<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
c/o Pegasus Communications Management Company
225 City Line Avenue
Suite 200
Bala Cynwyd, Pennsylvania 19004
February 29, 2000
Dear Fellow Stockholder:
You are cordially invited to attend the special meeting of stockholders of
Pegasus Communications Corporation on March 22, 2000, at 10 a.m., local time,
at CIBC World Markets Corp., 3rd Floor, 425 Lexington Avenue, New York, New
York.
At the special meeting, you will be asked to consider and vote upon, among
other things, a proposal to approve and adopt the Agreement and Plan of Merger
dated January 10, 2000, among Pegasus, Golden Sky Holdings, Inc., Pegasus GSS
Merger Sub, Inc., a wholly-owned subsidiary of Pegasus, certain stockholders of
Pegasus and certain stockholders of Golden Sky.
The merger agreement provides for Golden Sky to become a wholly-owned
subsidiary of Pegasus. As a result of the merger and related transactions,
o with certain exceptions, the Golden Sky capital stock will be exchanged
for shares of Pegasus Class A common stock;
o all holders of Golden Sky options and warrants will have the right to
receive options and warrants to purchase Pegasus Class A common stock;
o Pegasus' board of directors will be increased to eleven members, two of
whom will be designated by certain stockholders of Golden Sky; and
o certain stockholders of Golden Sky, certain former stockholders of
Digital Television Services, Inc., and I, together with certain of my
affiliates who hold all of the Pegasus Class B common stock, will enter
into a voting agreement with respect to the designation and election of
directors.
A maximum of 6,500,000 shares of Pegasus Class A common stock will be issued to
the Golden Sky stockholders. This is subject to reduction for a number of
items, including outstanding warrants and options. In addition, certain holders
of Golden Sky's capital stock will have the right to sell shares to Pegasus for
up to $25.0 million in cash, which will reduce the number of shares of Class A
common stock to be issued to the Golden Sky stockholders in the merger.
Although the number of shares of Pegasus Class A common stock to be issued in
the merger after all required reductions cannot be precisely determined until
just before the closing of the merger, it is anticipated that approximately
6,085,000 shares will be issued in the merger together with options and
warrants to purchase approximately 415,000 shares of Pegasus Class A common
stock. After giving effect to the merger, Golden Sky's stockholders (other than
option and warrant holders) will own approximately 22.9% of the common equity
of Pegasus. After giving effect to the merger and the voting rights of Pegasus'
Class B common stock, Golden Sky's stockholders and I will have voting power
with respect to approximately 9.0% and 67.7%, respectively, of Pegasus' common
stock.
The board of directors believes that the merger will provide significant
value to Pegasus and its stockholders by offering opportunities for continued
growth and economies of scale and has determined that the merger is, therefore,
in the best interests of Pegasus and its stockholders. The board of directors
has unanimously approved the merger proposal and recommends that you vote for
the merger proposal.
The special meeting will also consider amendments to Pegasus' restricted
stock plan and stock option plan, and amendments to Pegasus' certificate of
incorporation to increase the number of authorized shares of Class A common
stock, Class B common stock, non-voting common stock and preferred stock.
You should read carefully the accompanying notice of special meeting of
stockholders and the proxy statement/prospectus for details of the merger, the
other proposals to be voted upon at the special meeting, and additional related
information.
It is important that your shares be represented at the special meeting
whether or not you attend. I urge you to sign, date and return the enclosed
proxy at your earliest convenience.
Sincerely,
MARSHALL W. PAGON
President, Chief Executive Officer and
Chairman of the Board
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
c/o Pegasus Communications Management Company
225 City Line Avenue
Suite 200
Bala Cynwyd, Pennsylvania 19004
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on March 22, 2000
---------------------
To the Stockholders of Pegasus Communications Corporation:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Pegasus
Communications Corporation will be held on March 22, 2000, at 10 a.m., at CIBC
World Markets Corp., 3rd Floor, 425 Lexington Avenue, New York, New York.
The special meeting will be held for the following purposes:
I. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger dated January 10, 2000, as amended, among
Pegasus, Golden Sky Holdings, Inc., Pegasus GSS Merger Sub, Inc., a
wholly-owned subsidiary of Pegasus, certain stockholders of Pegasus and
certain stockholders of Golden Sky, and related transactions.
II. To amend the Pegasus Communications Restricted Stock Plan to increase
the number of shares of Class A common stock that may be issued
thereunder from 350,000 to 750,000.
III. To amend the Pegasus Communications 1996 Stock Option Plan to increase
the number of shares of Class A common stock that may be issued
thereunder from 1,300,000 to 3,000,000 and to increase the maximum
number of shares of Class A common stock that may be issued under
options granted to any employee from 550,000 to 1,000,000.
IV. To amend Pegasus' certificate of incorporation to increase the number
of authorized shares of Class A common stock from 50,000,000 to
250,000,000 shares.
V. To amend Pegasus' certificate of incorporation to increase the number
of authorized shares of Class B common stock from 15,000,000 to
30,000,000 shares.
VI. To amend Pegasus' certificate of incorporation to increase the number
of authorized shares of non-voting common stock from 20,000,000 to
200,000,000 shares.
VII. To amend Pegasus' certificate of incorporation to increase the number
of authorized shares of preferred stock from 5,000,000 to 20,000,000
shares.
VIII. To transact such other business as may properly come before the
special meeting or any adjournment or postponement thereof.
Copies of the merger agreement, as amended, the voting agreement that will
be entered into in connection with the merger, and the proposed amendments to
the restricted stock plan, the stock option plan and the certificate of
incorporation are attached to the proxy statement/prospectus as Annexes I
through V, respectively, and are incorporated herein by reference.
The merger proposal will be voted upon as a single proposal. Failure of
the merger proposal to be approved by the stockholders will result in the
termination of the merger agreement and the other transactions contemplated by
the merger agreement and no right of Golden Sky's stockholders to receive
Pegasus securities.
The board of directors has fixed February 25, 2000 as the record date for
the determination of stockholders entitled to notice of and to vote at the
special meeting.
The special meeting is not being held in lieu of an annual meeting.
Pegasus intends to hold its annual meeting in June 2000 at which time an
election of directors will take place.
All stockholders are cordially invited to attend the special meeting in
person. However, to ensure your representation at the special meeting, you are
urged to complete, sign and date the enclosed proxy card and return it as
promptly as possible in the enclosed envelope. No postage is required if the
proxy is mailed in the United States.
BY ORDER OF THE BOARD OF DIRECTORS,
TED S. LODGE
Dated: February 29, 2000 Secretary
<PAGE>
PROXY STATEMENT
FOR SPECIAL MEETING OF
STOCKHOLDERS OF PEGASUS COMMUNICATIONS CORPORATION
TO BE HELD MARCH 22, 2000
---------------------
PEGASUS COMMUNICATIONS CORPORATION
PROSPECTUS
6,500,000 Shares of Class A Common Stock
We are furnishing this proxy statement/prospectus to holders of our Class
A common stock and Class B common stock in connection with the solicitation of
proxies by Pegasus' board of directors for use at the special meeting of
stockholders of Pegasus to be held on March 22, 2000, or any adjournment or
postponement thereof.
The special meeting has been called to consider and vote upon the
following proposals:
o to approve and adopt the Agreement and Plan of Merger dated January 10,
2000, as amended, among Pegasus, Pegasus GSS Merger Sub, Inc., a
wholly-owned subsidiary of Pegasus, certain of Pegasus' stockholders,
Golden Sky Holdings, Inc., and certain stockholders of Golden Sky, which
merger agreement provides for Golden Sky to become a wholly-owned
subsidiary of Pegasus and for Pegasus to issue up to 6,500,000 shares of
Class A common stock to Golden Sky's stockholders subject to certain
reductions;
o to amend Pegasus' restricted stock plan to increase the number of shares
of Class A common stock that may be issued thereunder from 350,000 to
750,000;
o to amend Pegasus' stock option plan to increase the number of shares that
may be issued thereunder from 1,300,000 to 3,000,000 and to increase the
maximum number of Shares of Class A common stock that may be issued under
options granted to any executive officer from 550,000 to 1,000,000;
o to amend Pegasus' certificate of incorporation to increase the number of
authorized shares of Class A common stock from 50,000,000 shares to
250,000,000 shares;
o to amend Pegasus' certificate of incorporation to increase the number of
authorized shares of Class B common stock from 15,000,000 to 30,000,000
shares;
o to amend Pegasus' certificate of incorporation to increase the number of
authorized shares of non-voting common stock from 20,000,000 to
200,000,000 shares; and
o to amend Pegasus' certificate of incorporation to increase the number of
authorized shares of preferred stock from 5,000,000 to 20,000,000.
The special meeting is not being held in lieu of an annual meeting.
This proxy statement/prospectus also constitutes the prospectus of Pegasus
with respect to up to 6,500,000 shares of Class A common stock that will be
issued to holders of the outstanding Golden Sky capital stock upon consummation
of the merger.
The Class A common stock is traded on the Nasdaq National Market under the
symbol "PGTV." On February 24, 2000, the last reported closing price of the
Class A common stock on the Nasdaq National Market was $118 5/8 per share.
These securities involve a high degree of risk. See Risk Factors,
beginning on page 11.
This proxy statement/prospectus and the accompanying form of proxy are
first being mailed to the stockholders of Pegasus on or about February 29,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this proxy statement/prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
The date of this proxy statement/prospectus is February 25, 2000.
<PAGE>
TABLE OF CONTENTS
Page
----------
WHERE YOU CAN FIND MORE
INFORMATION ................................... iv
SUMMARY .......................................... 1
RISK FACTORS ..................................... 11
Risks Associated With The Merger .............. 11
Pegasus May Not Be Able to Arrange
Financing In Order to Offer to
Purchase Golden Sky Notes ............... 11
We May Not Be Able to Integrate
Golden Sky's Operations Successfully..... 11
We Will Incur Significant Transaction
Expenses and Costs of Integration as a
Result of the Merger .................... 12
The Merger Will Have a Dilutive Effect
on Our Earnings Per Share ............... 12
Risks of Our Direct Broadcast Satellite
Business ................................... 12
Satellite and Direct Broadcast Satellite
Technology Could Fail or Be Impaired..... 12
Events at DIRECTV Could Adversely
Affect Us ............................... 12
Programming Costs May Increase, Which
Could Adversely Affect Our Direct
Broadcast Satellite Business ............ 13
We May Lose Our DIRECTV Rights
After the Initial Term of Our
Agreements With the National Rural
Telecommunications Cooperative .......... 13
The Effect of New Federal Satellite
Television Legislation on Our Business
Is Unclear .............................. 13
We Could Lose Money Because of
Signal Theft ............................ 13
We Could Lose Revenues if We Have
Out-of-Territory Subscribers ............ 14
Direct Broadcast Satellite Services Face
Competition from Cable Operators ........ 14
Direct Broadcast Satellite Equipment
Shortages Could Adversely Affect Our
Direct Broadcast Business ............... 14
Risks of Our Broadcast Television
Business ................................... 14
Our Broadcast Operations Could Be
Adversely Affected if We Fail To
Negotiate Successfully Our Network
Affiliation Agreements .................. 14
Fox Could Cancel Our Affiliation
Agreements if It Acquires a Significant
Ownership Interest in One of Our
Markets ................................. 14
Our Broadcast Operations Could Be
Adversely Affected if the FCC
Prevents Our Local Marketing
Agreement Strategy ...................... 14
<PAGE>
Page
----
Antitrust Laws Could Limit Our Local
Marketing Agreement Strategy ............. 15
Our Inability To Control Licensees Under
Our Local Marketing Agreements
Could Adversely Affect Our Broadcast
Operations .............................. 15
The Planned Industry Conversion to
Digital Television Could Adversely
Affect Our Broadcast Business ........... 15
The New Federal Satellite Television
Legislation Could Adversely Affect
Our Broadcast Business .................. 16
Risks of Our Cable Business ................... 16
We Could Lose Revenues Because of
Our Geographic Concentration in
Puerto Rico ............................. 16
The FCC's Digital Television
Requirements May Prevent Us from
Expanding Our Cable Programming ......... 16
We Could Become Subject to Rate
Regulation Which Could Reduce Our
Cable Revenues .......................... 16
Other Risks of Our Business ................... 16
We Face Certain Other Regulatory Risks...... 16
We Have a History of Substantial Losses;
We Expect Them To Continue; Losses
Could Adversely Affect Our Stock
Price and Access to Capital Markets ..... 17
We Face Significant Competition; the
Competitive Landscape Changes
Constantly .............................. 17
Our Acquisition Strategy May Become
Too Expensive Which Could Adversely
Affect Our Financial Performance ........ 17
We May Not Be Able To Get the
Consents Necessary To Implement Our
Acquisition Strategy .................... 17
We May Not Be Able To Integrate
Acquired Companies Successfully
Which Could Affect Our Financial
Performance ............................. 17
Our Credit Arrangements and Publicly
Held Debt and Preferred Stock Limit
Our Ability to Pay Dividends on Our
Class A Common Stock .................... 18
Marshall W. Pagon Owns and Controls
Most of the Voting Power of Pegasus ..... 18
Our Stock Price Has Been Volatile .......... 18
Our Certificate of Incorporation and
Publicly Held Debt and Preferred
Stock Could Delay, Deter or Prevent a
Change of Control of Pegasus ............ 18
The Year 2000 Problem Could Adversely
Affect Us ............................... 19
We May Not Be Aware of All Risks ........... 19
i
<PAGE>
Page
-----
Risk Factors Relating to Golden Sky's
Business ..................................... 19
Golden Sky Has A Limited Operating
History and History of Negative Cash
Flow ..................................... 20
Golden Sky May Not Be Able To Make
Principal or Interest Payments on Its
Substantial Debt ......................... 20
Golden Sky's Substantial Debt Could
Adversely Affect Its Ability to Execute
Its Business Strategy .................... 20
If Golden Sky Fails to Comply With the
Restrictive Covenants of Its Debt
Instruments, Its Debt Could Be
Accelerated and There May Be
Insufficient Assets to Meet Its
Obligations .............................. 20
Golden Sky May Not Have Enough
Capital to Execute Its Business
Strategy ................................. 20
Any Change in Golden Sky's
Relationship With the National Rural
Telecommunications Cooperative or
the National Rural Telecommunications
Cooperative's Relationship With
DIRECTV Could Adversely Affect Its
Ability to Earn Revenues ................. 21
Golden Sky's Ability to Earn Revenues
and Its Operating Costs Could Be
Adversely Affected If the National
Rural Telecommunications Cooperative
Is Unable to Provide It With Essential
Support Services and Accurate
Subscriber Information ................... 21
The National Rural Telecommunications
Cooperative May Not Act in Golden
Sky's Best Interests, Which Could
Adversely Affect Its Rights and
Costs of Distributing DIRECTV
Programming in Its Markets ............... 21
Changes in National Rural
Telecommunications Cooperative
Policies May Adversely Affect Golden
Sky's Ability to Provide DIRECTV
Programming in Its Markets ............... 21
Recent Consolidation Among Direct
Broadcast Satellite Operators and
Related Litigation Could Adversely
Affect Golden Sky's DIRECTV
Programming Rights, Costs of
Providing Programming to
Subscribers and Capital
Requirements ............................. 22
Risk That Forward-Looking Statements
May Prove Inaccurate ........................ 22
COMPARATIVE PER SHARE
DATA ........................................... 24
<PAGE>
Page
--
MARKET PRICE INFORMATION AND
DIVIDENDS ....................................... 26
Pegasus ........................................ 26
Golden Sky ..................................... 26
THE SPECIAL MEETING ............................... 27
Solicitation ................................... 27
Voting; Record Date and Revocability of
Proxies ..................................... 27
Quorum ......................................... 28
Purpose of the Special Meeting ................. 28
PROPOSAL 1: APPROVAL OF MERGER .................... 29
Background of the Merger ....................... 29
Reasons for the Merger and
Recommendations of Pegasus' Board of
Directors ................................... 30
Opinion of CIBC World Markets Corp ............. 31
Interests of Certain Persons in the Merger ..... 38
Ownership of Pegasus After the Merger .......... 38
Management of Pegasus After the Merger ......... 38
PROPOSAL 2: AMENDMENT TO
RESTRICTED STOCK PLAN .......................... 39
PROPOSAL 3: AMENDMENT TO STOCK
OPTION PLAN .................................... 42
PROPOSAL 4: AMENDMENT TO
CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF
AUTHORIZED SHARES OF CLASS A
COMMON STOCK FROM 50,000,000 TO
250,000,000 SHARES ............................. 45
PROPOSAL 5: AMENDMENT TO
CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF
AUTHORIZED SHARES OF CLASS B
COMMON STOCK FROM 15,000,000 TO
30,000,000 SHARES .............................. 46
PROPOSAL 6: AMENDMENT TO
CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF
AUTHORIZED SHARES OF
NON-VOTING COMMON STOCK FROM
20,000,000 TO 200,000,000 SHARES ............... 47
PROPOSAL 7: AMENDMENT TO
CERTIFICATE OF INCORPORATION TO
INCREASE THE NUMBER OF
AUTHORIZED SHARES OF
PREFERRED STOCK FROM 5,000,000
TO 20,000,000 SHARES ........................... 48
PROPOSAL 8: OTHER MATTERS ......................... 49
THE MERGER ........................................ 50
The Merger Agreement ........................... 50
Termination .................................... 53
Voting Agreement ............................... 54
Registration Rights Agreement .................. 56
Consequences Under Debt Agreements and
Preferred Stock Terms ....................... 57
Certain Federal Income Tax Consequences......... 58
Accounting Treatment ........................... 60
ii
<PAGE>
Page
------
Federal Securities Law Consequences ........... 60
PEGASUS' SELECTED HISTORICAL AND
PRO FORMA CONSOLIDATED
FINANCIAL DATA ............................... 61
GOLDEN SKY'S SELECTED HISTORICAL
CONSOLIDATED FINANCIAL DATA .................. 63
PEGASUS MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS ................................... 65
General ...................................... 65
Results of Operations ........................ 66
Liquidity and Capital Resources .............. 70
New Accounting Pronouncements ................ 75
Other ........................................ 75
GOLDEN SKY MANAGEMENT'S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ........................ 76
Overview ..................................... 76
Results of Operations ........................ 78
Liquidity and Capital Resources .............. 81
Recent Accounting Developments ............... 85
BUSINESS OF PEGASUS ............................. 86
General ...................................... 86
Direct Broadcast Satellite Television ........ 86
DIRECTV ...................................... 86
DIRECTV Rural Affiliates ..................... 87
Pegasus Rural Focus and Strategy ............. 87
Satellite Services in Rural Areas ............ 88
Consolidation of DIRECTV Rural Affiliates..... 88
The Pegasus Retail Network ................... 89
Broadcast Television ......................... 89
Cable Television ............................. 90
Recent Completed and Pending
Transactions .............................. 91
Competition .................................. 92
Employees .................................... 92
Direct Broadcast Satellite Agreements,
Licenses, Local Marketing Agreements
and Cable Franchises ...................... 92
Legislation and Regulation ................... 97
Legal Proceedings ............................ 108
Properties ................................... 110
BUSINESS OF GOLDEN SKY .......................... 111
General ...................................... 111
Sales and Distribution ....................... 111
Marketing .................................... 112
<PAGE>
Page
----
Customer Service ............................. 112
National Rural Telecommunications
Cooperative and DIRECTV ................... 112
Competition .................................. 112
Regulation ................................... 114
Facilities ................................... 114
Management and Employees ..................... 114
Legal Proceedings ............................ 114
PEGASUS MANAGEMENT .............................. 115
CERTAIN TRANSACTIONS ............................ 121
OWNERSHIP AND CONTROL ........................... 125
DESCRIPTION OF CAPITAL STOCK .................... 130
COMPARISON OF STOCKHOLDERS'
RIGHTS ....................................... 134
State of Incorporation ....................... 134
Authorized Capital ........................... 134
Voting, Liquidation, and Other Rights ........ 135
Dividend Rights .............................. 136
Size and Make-up of the Board of
Directors ................................. 137
Preemptive Rights ............................ 137
Change of Control ............................ 137
Conversion Rights and Transfer
Restrictions .............................. 138
Class Voting ................................. 139
LEGAL MATTERS ................................... 139
EXPERTS ......................................... 139
FINANCIAL STATEMENT INDEX ....................... F-1
ANNEX I -- AGREEMENT AND PLAN OF
MERGER, AS AMENDED ........................... I-1
ANNEX II -- FORM OF VOTING
AGREEMENT .................................... II-1
ANNEX III -- AMENDMENT TO THE
PEGASUS COMMUNICATIONS
RESTRICTED STOCK PLAN ........................ III-1
ANNEX IV -- AMENDMENT TO THE
PEGASUS COMMUNICATIONS 1996
STOCK OPTION PLAN ............................ IV-1
ANNEX V -- PROPOSED AMENDMENT
TO PEGASUS' CERTIFICATE OF
INCORPORATION TO INCREASE
AUTHORIZED CLASS A COMMON
STOCK, CLASS B COMMON STOCK,
NON-VOTING COMMON STOCK AND
PREFERRED STOCK .............................. V-1
ANNEX VI -- OPINION OF CIBC WORLD
MARKETS CORP. ................................ VI-1
ANNEX VII -- FORM OF PROXY ...................... VII-1
iii
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Pegasus files annual, quarterly and special reports, as well as proxy
statements and other information with the SEC. You may read and copy any of the
documents we file with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549 or at its regional offices located at 7
World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may
obtain further information about the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0300. These SEC filings are also available to the
public over the Internet at the SEC's web site at http://www.sec.gov, which
contains reports, proxy information statements and other information regarding
registrants like Pegasus that file electronically with the SEC. Pegasus' Class
A common stock is quoted on the Nasdaq National Market and reports and other
information about us may be inspected at the Nasdaq National Market at 1735 K
Street, N.W., Washington, D.C. 20007-1500.
Copies of these filings may also be obtained at no cost from: Pegasus
Communications Management Company, 225 City Line Avenue, Suite 200, Bala
Cynwyd, PA 19004; Telephone: (888) 438-7488; Attention: Vice President,
Corporate Communications.
You should rely only on the information provided in this proxy statement/
prospectus. Pegasus has not authorized anyone to provide you with
different information. You should not assume that the information
in this proxy statement/prospectus is accurate as of any date
other than the date on the cover page of this proxy
statement/prospectus. Pegasus is not making
this offer of securities in any state
or country in which the offer or sale
is not permitted.
iv
<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this proxy
statement/prospectus. This summary is not complete and may not contain all of
the information that you should consider before deciding to vote on the
proposals or invest in Pegasus' Class A common stock. We urge you to read the
entire proxy statement/prospectus carefully, including the more detailed
information set forth elsewhere in this proxy statement/prospectus, the Risk
Factors section and the consolidated financial statements and the notes to
those statements included herein. Portions of this proxy statement/prospectus
contain certain forward-looking statements that involve risks and
uncertainties. Pegasus' and Golden Sky's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in Risk Factors. Although we believe with respect to the
statements about Pegasus, and Golden Sky believes with respect to the
statements about it, that the assumptions underlying the forward-looking
statements contained in this proxy statement/prospectus are reasonable, any of
the assumptions could prove inaccurate. Therefore, we cannot assure you that
any of the forward-looking statements included in this proxy
statement/prospectus will prove accurate.
Unless the context otherwise requires, all references to "we," "our", "us"
and "Pegasus" refer to Pegasus Communications Corporation, together with its
direct and indirect subsidiaries, and "Golden Sky" refers to Golden Sky
Holdings, Inc., together with its direct and indirect subsidiaries which
include Golden Sky DBS, Inc. and Golden Sky Systems, Inc. When we describe the
size of Pegasus' business in this summary -- for example, the number of homes
in our territories and how many subscribers we have -- we are assuming that we
will complete the pending acquisitions and sale described in Business of
Pegasus -- Recent Completed and Pending Transactions, excluding the merger. We
have also assumed, unless otherwise noted, that 6.1 million shares of Class A
common stock will be issued in connection with the merger and that 10,000
shares of Series E junior convertible participating preferred stock have been
issued in connection with another one of our pending acquisitions.
The Companies
Pegasus
Pegasus Communications Corporation is:
o The largest independent distributor of DIRECTV(R) with approximately
752,800 subscribers at December 31, 1999. Pegasus has the exclusive
right to distribute DIRECTV digital broadcast satellite services to
over 5.3 million rural households in 36 states. We distribute DIRECTV
through the Pegasus retail network, a network in excess of 2,500
independent retailers.
o The owner or programmer of ten TV stations affiliated with either Fox,
UPN or the WB.
o One of the fastest growing media companies in the United States. We
have increased our revenues at a compound growth rate of 89% per
annum since our inception in 1991.
We were incorporated in Delaware in May 1996. Our principal executive
office is c/o Pegasus Communications Management Company, 225 City Line Avenue,
Suite 200, Bala Cynwyd, PA 19004, and our telephone number is (888) 438-7488.
Golden Sky
Golden Sky is the second largest independent distributor of DIRECTV
satellite television programming in rural markets in the United States.
Golden Sky has the exclusive right to provide DIRECTV programming in 57
of the 250 rural DIRECTV markets served by members and affiliates of the
National Rural Telecommunications Cooperative, including markets Golden Sky
acquired during 1999. Golden Sky's rural DIRECTV markets, which are located in
24 states, contain approximately 1.9 million households. As of December 31,
1999, Golden Sky had approximately 345,200 subscribers.
Golden Sky's principal executive offices are located at 4700 Belleview
Avenue, Suite 300, Kansas City, Missouri 64112, and Golden Sky's telephone
number is (816) 753-5544.
1
<PAGE>
The Special Meeting
Date, Time and Place of the Special Meeting
The special meeting of holders of common stock will be held on March 22,
2000, at 10 a.m., local time, at CIBC World Markets Corp., 3rd Floor, 425
Lexington Avenue, New York, New York.
Record Date; Shares Entitled to Vote
Holders of record of common stock at the close of business on February
25, 2000, are entitled to notice of and to vote at the special meeting.
Purpose of the Special Meeting
Holders of common stock will be asked to consider and vote on the
following proposals:
o to approve the proposed merger between our subsidiary and Golden Sky;
o to amend Pegasus' restricted stock plan to increase the number of
shares to be issued thereunder from 350,000 to 750,000;
o to amend Pegasus' stock option plan to increase the number of shares
to be issued thereunder from 1,300,000 to 3,000,000 and to increase
the maximum number of shares of Class A common stock that may be
issued under options granted to any employee from 550,000 to
1,000,000;
o to amend Pegasus' certificate of incorporation to increase the number
of authorized shares of Pegasus' Class A common stock from 50,000,000
shares to 250,000,000 shares;
o to amend Pegasus' certificate of incorporation to increase the number
of authorized shares of Pegasus' Class B common stock from 15,000,000
shares to 30,000,000 shares;
o to amend Pegasus' certificate of incorporation to increase the number
of authorized shares of Pegasus' non-voting common stock from
20,000,000 shares to 200,000,000 shares;
o to amend Pegasus' certificate of incorporation to increase the number
of authorized shares of Pegasus' preferred stock from 5,000,000
shares to 20,000,000 shares; and
o to transact such other business as may properly come before the
special meeting or any adjournment or postponement thereof.
<PAGE>
Votes Required; Security Ownership of Marshall W. Pagon
The proposals to be acted on at the special meeting require the following
votes to be approved:
<TABLE>
<S> <C>
Merger with Golden Sky and amendments to the Majority of voting power of the Class A and
restricted stock plan and stock option plan. Class B common stock present at the
meeting in person or by proxy, voting
together as a single class.
Amendments to certificate of incorporation Majority of voting power of all outstanding
increasing Class A common stock and Class A and Class B common stock, voting
non-voting common stock. together as a single class.
Amendment to certificate of incorporation Majority of all outstanding shares of Class A
increasing Class B common stock. common stock and Class B common stock,
voting as separate classes.
Amendment to certificate of incorporation Majority of voting power of all outstanding
increasing preferred stock. Class A and Class B common stock voting
together as a single class, and majority of
all outstanding Series A preferred stock and
Series C convertible preferred stock, voting
together as a single class.
</TABLE>
2
<PAGE>
If a proxy is marked as "withhold authority" or "abstain" on any matter,
or if specific instructions are given that no vote be cast on any specific
matter, the shares represented by such proxy will not be voted on such matter.
Abstentions will be included within the number of shares present at the special
meeting and entitled to vote for the purposes of determining whether a matter
has been authorized, but other types of non-votes, including non-votes by
broker nominees, will not be so included.
As of the record date, there were outstanding 15,895,968 shares of Class
A common stock and 4,581,900 shares of Class B common stock. Each record holder
of Class A common stock will be entitled to one vote per share, and each record
holder of Class B common stock will be entitled to ten votes per share. All of
the shares of Class B common stock are owned beneficially by Marshall W. Pagon,
Pegasus' President, Chief Executive Officer and Chairman of the Board. Thus,
Mr. Pagon has voting power to approve the merger proposal and the other
proposals to be voted upon at the special meeting without the vote of any other
stockholder, except for the proposals to amend Pegasus' certificate of
incorporation to increase the number of authorized shares of Class B common
stock and preferred stock. Mr. Pagon has advised Pegasus that he intends to
cause the record holders of the Class B common stock to vote in favor of all
such proposals.
The Merger Proposal
Under the terms of the merger agreement, and subject to the satisfaction
of the conditions set forth in the agreement:
o Pegasus GSS Merger Sub will merge with and into Golden Sky and Golden
Sky will become a wholly-owned subsidiary of Pegasus;
o with certain exceptions, the Golden Sky capital stock will be
exchanged for shares of Pegasus' Class A common stock, and holders of
outstanding Golden Sky options and warrants will receive options and
warrants to purchase shares of Pegasus' Class A common stock;
o Pegasus' board of directors will be increased to eleven members,
including two directors to be designated by certain stockholders of
Golden Sky; and
o certain stockholders of Golden Sky, Marshall W. Pagon, Pegasus'
President, Chief Executive Officer and Chairman of the Board, certain
other Pegasus shareholders and certain affiliates of Mr. Pagon who
hold all of the Class B common stock will amend and restate a voting
agreement which provides for the designation and election of
directors.
A maximum of 6,500,000 shares of Pegasus Class A common stock will be
issued to the Golden Sky stockholders. This is subject to reduction for a
number of items, including outstanding warrants and options. In addition,
certain holders of Golden Sky's capital stock will have the right to sell
shares to Pegasus for up to $25.0 million in cash, which will reduce the number
of shares of Pegasus Class A common stock to be issued to the Golden Sky
stockholders in the merger.
Although the number of shares of Pegasus Class A common stock to be
issued in the merger cannot be precisely determined until just before the
closing of the merger, it is anticipated that approximately 6,085,000 shares
will be issued, together with options to purchase approximately 415,000 shares
of Pegasus Class A common stock. After giving effect to the merger, assuming
that none of Golden Sky's stockholders perfect rights of appraisal, Golden
Sky's stockholders, other than option and warrant holders, will own
approximately 22.9% of the issued and outstanding Class A common stock. After
giving effect to the merger and the voting rights of the Class B common stock,
the stockholders of Golden Sky and Marshall W. Pagon will have voting power
with respect to approximately 9.0% and 67.7%, respectively, of Pegasus' common
stock.
Recommendations of Pegasus' Board of Directors
Pegasus' board of directors has unanimously determined that the merger
is in the best interests of Pegasus and recommends that holders of the common
stock vote in favor of the merger proposal. The decision of Pegasus' board of
directors to enter into the merger agreement and to recommend that Pegasus'
stockholders vote in favor of the merger proposal is based upon its
3
<PAGE>
evaluation of a number of factors described in this proxy statement/prospectus.
See Proposal 1: Approval of Merger -- Reasons for the Merger and
Recommendations of Pegasus' Board of Directors.
Pegasus' board of directors has unanimously determined that the
amendment to increase the number of shares of Class A common stock that may be
issued under the restricted stock plan is advisable in light of the increased
number of employees who will be eligible to participate in that plan after the
merger is consummated. Pegasus' board of directors has also unanimously
determined that the amendments to increase the number of options that may be
granted under the stock option plan are advisable because of the number of
options that may need to be issued under the plan to replace outstanding
options to purchase Golden Sky common stock, because of the increased number of
directors who will be eligible to participate in this plan and because Pegasus
has already issued options covering all of the shares of Class A common stock
currently authorized to be issued under the stock option plan.
Pegasus' board of directors has unanimously also determined that the
amendment to increase the number of authorized shares of Class A common stock
is advisable in light of the shares to be issued in the merger and the increase
in the number of shares that may be issued under Pegasus' restricted stock plan
and stock option plan. The increase in the authorized number of shares of Class
A common stock is also needed in order to permit Pegasus to effect a stock
split or pay stock dividends, if the board decides to do so in the future, and
in connection with possible future acquisitions and financings.
Each share of Class B common stock is convertible into one share of
Class A common stock. In addition, the certificate of incorporation requires
that any stock split or stock dividend on the Class A common stock be
accompanied by parallel action on the Class B common stock. Therefore, Pegasus'
board of directors has also unanimously determined that the amendment to
increase the number of authorized shares of Class B common stock is advisable
in order to enable Pegasus to issue additional shares of Class A common stock
in connection with stock splits, payment of dividends and similar transactions,
if the board decides to do so in the future, without affecting the current
voting percentages of Pegasus' respective shareholders.
Pegasus' board of directors has also unanimously determined that the
increase in the authorized number of shares of non-voting common stock is
needed in order to permit Pegasus to pay a stock dividend in shares of
non-voting common stock on its Class A and Class B common stock, if the board
decides to do so in the future, as well as in connection with possible future
acquisitions and financings.
Pegasus' board of directors has further unanimously determined that the
amendment to increase the number of authorized shares of preferred stock is
advisable in light of future financings, acquisitions and other possible
transactions.
Opinion of CIBC World Markets Corp.
Pegasus' board of directors has received an opinion of CIBC World
Markets as to the fairness, from a financial point of view, to Pegasus of the
exchange ratio in the merger. For purposes of CIBC World Markets' opinion, the
exchange ratio was defined as the ratio of the aggregate number of shares of
Pegasus' Class A common stock -- that is, up to 6,500,000 shares of Pegasus'
Class A common stock -- into which the aggregate number of outstanding shares
of Golden Sky's capital stock will be converted in the merger. The full text of
CIBC World Markets' written opinion dated January 10, 2000 is included in this
proxy statement/prospectus as Annex VI. We encourage you to read this opinion
carefully in its entirety for a description of the assumptions made, matters
considered and limitations on the review undertaken. CIBC World Markets'
opinion is directed to Pegasus' board of directors and does not constitute a
recommendation to any stockholder as to any matters relating to the proposed
merger. This opinion also does not address the allocation of the Pegasus stock
to be issued in the merger among the various Golden Sky stockholders. See
Proposal 1: Approval of Merger -- Opinion of CIBC World Markets Corp.
Purchase of Certain Shares of Golden Sky
Prior to the merger, Pegasus is obligated to purchase for cash the
shares of certain
4
<PAGE>
stockholders of Golden Sky's capital stock who wish to sell their stock to
Pegasus for aggregate consideration of up to $25.0 million in cash. If
consummated, these purchases will have the effect of reducing the number of
shares of Pegasus' Class A common stock that will be issued in the merger. See
The Merger.
Interests of Certain Persons in the Merger
At the effective time of the merger, Marshall W. Pagon and the holders
of the Class B common stock, certain stockholders of Golden Sky and certain
former stockholders of Digital Television Services, Inc. will amend and restate
the voting agreement that was entered into when Pegasus acquired Digital
Television Services in 1998. According to the terms of the amended and restated
voting agreement, the parties to the amended and restated voting agreement will
each have the right to designate one or more directors to Pegasus' board of
directors. See The Merger -- Voting Agreement.
In addition, certain stockholders of Golden Sky will have registration
rights with respect to the shares of Class A common stock issued to them in the
merger. See The Merger -- Registration Rights Agreement.
Management of Pegasus After the Merger
At the effective time of the merger, Pegasus' board of directors will be
increased to eleven members, including two directors to be designated by
certain of Golden Sky's stockholders pursuant to the voting agreement. The
relevant Golden Sky stockholders have advised Pegasus that they intend to
designate Robert F. Benbow and William P. Collatos to Pegasus' board of
directors. See The Merger -- Voting Agreement.
Accounting Treatment
The merger will be accounted for under the purchase method of accounting
in accordance with generally accepted accounting principles. See The Merger --
Accounting Treatment.
Certain Federal Income Tax Consequences
Pegasus and Golden Sky intend the merger to be a tax-free reorganization
for federal income tax purposes so that no gain or loss will be recognized by
Pegasus' stockholders, Golden Sky's stockholders, Pegasus or Golden Sky, except
to the extent of any cash received by certain holders of Golden Sky's capital
stock in connection with their sales of shares to Pegasus prior to the merger
and any cash received in lieu of fractional shares or upon a Golden Sky
stockholder's exercise of dissenters' appraisal rights. See The Merger --
Certain Federal Income Tax Consequences.
Federal Securities Law Consequences
Golden Sky stockholders who are not affiliates of Golden Sky and who do
not become affiliates of Pegasus following the merger may freely transfer the
shares of Pegasus' Class A common stock that they receive in the merger.
However, pursuant to the terms of the registration rights agreement to be
signed at the closing of the merger, if certain conditions are met, the
principal Golden Sky stockholders will agree not to transfer their shares of
Class A common stock before six months after the closing of the merger. In the
registration rights agreement, Pegasus will agree, under certain circumstances,
to register shares of Class A common stock held by certain stockholders of
Golden Sky. See The Merger -- Registration Rights Agreement.
Dissenters' Rights
In connection with the merger, none of Pegasus' stockholders will have
dissenters' appraisal rights; however, Golden Sky's stockholders will have such
rights under Delaware law. If Golden Sky's stockholders choose to exercise such
rights, the number of shares of Class A common stock to be issued in the merger
would be reduced. It is a condition to the merger that dissenters' appraisal
rights not be asserted by holders of Golden Sky capital stock entitled to
receive more than 10.0% of the Class A common stock to be issued in the merger.
Conditions to the Merger; Termination of the Merger Agreement
Pegasus' and Golden Sky's obligations to consummate the merger are
subject to the fulfillment of various conditions, including approval by third
parties and the stockholders of both companies. See The Merger -- Conditions
for a description of these and other conditions.
The merger agreement is subject to termination if certain events should
occur. See The Merger -- Termination for a description of these events.
5
<PAGE>
Comparison of Stockholder Rights
Both Pegasus and Golden Sky are incorporated under the laws of the State
of Delaware. For information comparing the rights of stockholders, see
Comparison of Stockholders' Rights.
Risk Factors
An investment in the Class A common stock involves a high degree of risk
and there are risks associated with the business of Golden Sky and with the
merger. Accordingly, you should consider the risk factors beginning on page 11
of this proxy statement/prospectus before voting or making an investment in
Pegasus' Class A common stock. See Risk Factors.
6
<PAGE>
Pegasus' Summary Historical and Pro Forma Consolidated Financial Data
The following table sets forth summary historical and pro forma
consolidated financial data for Pegasus. The statement of operating data
reflect net revenues and operating expenses from our continuing operations. The
results of operations from the entire cable segment have been classified as
discontinued and certain amounts for 1995 through 1998 have been restated. You
should read this information in conjunction with the consolidated financial
statements and the notes to them and other financial information, and Pegasus
Management's Discussion and Analysis of Financial Condition and Results of
Operations, included elsewhere in this proxy statement/prospectus. You should
also read the paragraphs following this table, which explain certain portions
of the table.
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
Statement of Operating Data: 1995 1996 1997
(Dollars in thousands)
<S> <C> <C> <C>
Net revenues:
DBS ................................................... $ 1,469 $ 5,829 $ 38,254
Broadcast ............................................. 20,073 28,604 31,876
--------- ---------- -----------
Total net revenues ................................... 21,542 34,433 70,130
Operating expenses:
DBS
Programming, technical and general and
administrative ..................................... 1,379 4,312 26,042
Marketing and selling ................................ -- 646 5,973
Incentive compensation ............................... 9 146 795
Depreciation and amortization ........................ 640 1,786 17,042
Broadcast
Programming, technical and general and
administrative ..................................... 10,181 13,903 15,672
Marketing and selling ................................ 3,789 4,851 5,704
Incentive compensation ............................... 415 691 298
Depreciation and amortization ........................ 2,934 4,041 3,754
Corporate expenses .................................... 1,364 1,429 2,256
Corporate depreciation and amortization ............... 492 988 1,353
Other expense, net .................................... 15 139 630
--------- ---------- -----------
Income (loss) from operations ........................ 324 1,501 (9,389)
Other Data:
Pre-marketing cash flow from continuing
operations:
DBS ................................................... $ 90 $ 1,517 $ 12,212
Broadcast ............................................. 6,103 9,850 10,500
--------- ---------- -----------
Total pre-marketing cash flow from continuing
operations ........................................... $ 6,193 $ 11,367 $ 22,712
========= ========== ===========
Location cash flow from continuing operations .......... $ 6,193 $ 10,721 $ 16,739
Operating cash flow from continuing operations ......... 4,829 9,292 14,483
Capital expenditures ................................... 2,640 6,294 9,929
Net cash provided by (used for):
Operating activities .................................. 5,783 3,059 8,478
Investing activities .................................. (6,047) (81,179) (142,109)
Financing activities .................................. 10,859 74,727 169,098
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
Pro Forma
Statement of Operating Data: 1998 1999 1999
(Dollars in thousands)
<S> <C> <C> <C>
Net revenues:
DBS ................................................... $ 147,142 $ 286,353 $ 426,926
Broadcast ............................................. 34,311 36,415 36,415
----------- --------- ---------
Total net revenues ................................... 181,453 322,768 463,341
Operating expenses:
DBS
Programming, technical and general and
administrative ..................................... 102,419 201,158 324,507
Marketing and selling ................................ 45,706 117,774 182,707
Incentive compensation ............................... 1,159 1,592 2,374
Depreciation and amortization ........................ 59,077 82,744 215,598
Broadcast
Programming, technical and general and
administrative ..................................... 18,056 22,812 22,812
Marketing and selling ................................ 5,993 6,304 6,304
Incentive compensation ............................... 177 57 57
Depreciation and amortization ........................ 4,557 5,144 5,144
Corporate expenses .................................... 3,614 5,975 5,975
Corporate depreciation and amortization ............... 2,105 3,119 3,119
Other expense, net .................................... 1,409 1,995 1,995
----------- --------- ---------
Income (loss) from operations ........................ (62,819) (125,906) (307,251)
Other Data:
Pre-marketing cash flow from continuing
operations:
DBS ................................................... $ 44,723 $ 85,195 $ 102,419
Broadcast ............................................. 10,262 7,299 7,299
----------- --------- ---------
Total pre-marketing cash flow from continuing
operations ........................................... $ 54,985 $ 92,494 $ 109,718
=========== ========= =========
Location cash flow from continuing operations .......... $ 9,279 ($ 25,280) ($ 72,989)
Operating cash flow from continuing operations ......... 5,665 (31,255) (78,964)
Capital expenditures ................................... 12,400 14,784 12,839
Net cash provided by (used for):
Operating activities .................................. (21,962) (88,879) NA
Investing activities .................................. (101,373) (133,981) NA
Financing activities .................................. 133,791 208,808 NA
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of December 31,
----------------------------------- ---------------------------------------
Pro Forma
1995 1996 1997 1998 1999 1999
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ........................... $21,856 $ 8,582 $ 45,269 $ 75,985 $ 42,832 $ 574,020
Working capital (deficiency) ........................ 17,566 6,430 32,347 37,889 (4,936) 496,137
Total assets ........................................ 95,770 173,680 380,862 886,310 945,332 2,742,170
Total debt (including current) ...................... 82,896 115,575 208,355 559,029 684,414 1,124,592
Total liabilities ................................... 95,521 133,354 239,234 699,144 862,725 1,684,463
Redeemable preferred stock .......................... -- -- 111,264 126,028 142,734 142,734
Convertible preferred stock ......................... -- -- -- -- -- 290,525
Minority interest ................................... -- -- 3,000 3,000 3,000 3,936
Total common stockholders' equity (deficit) ......... 249 40,326 27,364 58,138 (63,127) 620,512
</TABLE>
7
<PAGE>
The pro forma income statement and other data for the year ended December
31, 1999 include our pending cable sale, the closing of the new Pegasus Media &
Communications credit facility, the convertible preferred stock offering and
the merger with Golden Sky as if they had all occurred at the beginning of
1999. The pro forma balance sheet data as of December 31, 1999 includes the
pending cable sale, the investment in Personalized Media, the closing of the
new Pegasus Media & Communications credit facility, the convertible preferred
stock offering and the merger with Golden Sky as if such events had occurred on
such date.
The pro forma income statement data for the year ended December 31, 1999
do not include the $89.4 million gain from the pending sale of our Puerto Rico
cable system or the $15.2 million extraordinary net loss from the
extinguishment of debt.
In this section we use the terms pre-marketing cash flow from continuing
operations and location cash flow from continuing operations. Pre-marketing
cash flow from continuing operations is calculated by taking our earnings and
adding back the following expenses.
o interest and income taxes;
o depreciation and amortization and corporate overhead;
o extraordinary and non-recurring items;
o non-cash charges, such as incentive compensation under our restricted
stock plan and 401(k) plans;
o results of discontinued operations; and
o direct broadcast satellite subscriber acquisition costs, which are sales
and marketing expenses incurred to acquire new direct broadcast satellite
subscribers.
Location cash flow from continuing operations is pre-marketing cash flow
from continuing operations less direct broadcast satellite subscriber
acquisition costs.
Pre-marketing cash flow from continuing operations and location cash flow
from continuing operations are not, and should not be considered, alternatives
to income from operations, net income, net cash provided by operating
activities or any other measure for determining our operating performance or
liquidity, as determined under U.S. generally accepted accounting principles.
Pre-marketing cash flow from continuing operations and location cash flow from
continuing operations also do not necessary indicate whether our cash flow will
be sufficient to fund working capital, capital expenditures, or to react to
changes in Pegasus' industry or the economy generally. We believe that
pre-marketing cash flow from continuing operations and location cash flow from
continuing operations are important, however, for the following reasons:
o people who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors use to monitor our
financial performance and debt leverage.
8
<PAGE>
GOLDEN SKY'S SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents Golden Sky's financial and operating
information for the periods indicated. The historical financial information
presented below was taken from Golden Sky's audited consolidated financial
statements. Household and subscriber data presented below reflect 100% of the
households and subscribers comprising Golden Sky's rural DIRECTV markets,
including one rural DIRECTV market in which Golden Sky acquired less than 100%
ownership. In that market, Golden Sky acquired approximately 76% ownership.
Golden Sky receives 100% of the revenue generated by all subscribers in Golden
Sky's rural DIRECTV markets.
The following should be read in conjunction with Golden Sky's consolidated
financial statements and the notes to those financial statements and other
financial information, and Golden Sky Management's Discussion and Analysis of
Financial Condition and Results of Operations, appearing elsewhere herein.
<TABLE>
<CAPTION>
Inception
Through Years Ended December 31,
December 31, ----------------------------------------------
1996 1997 1998 1999
-------------- ------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Statement of Operations Data
Revenue:
DBS services .................................... $ 219 $ 16,452 $ 74,910 $ 139,933
Lease and other ................................. 36 944 1,014 640
-------- ---------- ---------- ----------
Total revenue ..................................... 255 17,396 75,924 140,573
Costs and Expenses:
Costs of DBS services ........................... 130 9,304 45,291 88,690
System operations ............................... 26 3,796 11,021 19,733
Sales and marketing ............................. 73 7,316 32,201 64,933
General and administrative ...................... 1,035 2,331 7,431 15,708
Depreciation and amortization ................... 97 7,300 23,166 35,963
-------- ---------- ---------- ----------
Total costs and expenses .......................... 1,361 30,047 119,110 225,027
-------- ---------- ---------- ----------
Operating loss .................................... (1,106) (12,651) (43,186) (84,454)
Net interest expense .............................. (61) (3,206) (18,965) (42,619)
Other non-operating expenses ...................... -- -- -- (1,259)
-------- ---------- ---------- ----------
Loss before extraordinary charge .................. (1,167) (15,857) (62,151) (128,332)
Extraordinary charge on early retirement of
debt ............................................ -- -- (2,577) (2,935)
-------- ---------- ---------- ----------
Net loss .......................................... (1,167) (15,857) (64,728) (131,267)
Preferred stock dividend requirements ............. -- (7,888) (14,855) (17,920)
-------- ---------- ---------- ----------
Net loss attributable to common
stockholders ................................... $ (1,167) $ (23,745) $ (79,583) $ (149,187)
======== ========== ========== ==========
Other Financial Data
EBITDA ............................................ $ (1,009) $ (5,351) $ (20,020) $ (48,337)
Net cash used in operating activities ............. (790) (3,111) (36,589) (61,101)
Net cash used in investing activities ............. (3,231) (120,729) (159,921) (12,232)
Net cash provided by financing activities ......... 4,500 136,997 187,362 72,115
Capital expenditures .............................. 105 998 3,317 3,452
Aggregate purchase price of acquisitions .......... 5,256 129,725 124,844 35,339
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Inception
Through Years Ended December 31,
December 31, ------------------------------------------------
1996 1997 1998 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operating Data
Households at end of period .................. 22,000 1,135,000 1,727,000 1,861,000
Subscribers acquired in acquisitions ......... 3,000 65,300 54,900 18,300
Subscribers added in existing rural
DIRECTV markets ............................ 100 21,500 77,200 104,900
Subscribers at end of period ................. 3,100 89,900 222,000 345,200
SAC per gross subscriber added ............... $ 290 $ 280 $ 320 $ 380
Penetration at end of period ................. 14.1% 7.9% 12.9% 18.5%
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1996 1997 1998 1999
----------- ----------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalents .............. $ 479 $ 13,636 $ 4,488 $ 3,270
Restricted cash:
Current .............................. -- -- 28,083 23,731
Long-term ............................ -- -- 23,534 --
Working capital (deficit) .............. (1,948) 3,843 15,244 (2,586)
Total assets ........................... 6,383 156,240 328,099 299,337
Total debt ............................. 4,450 69,113 278,204 369,378
Stockholders' equity (deficit) ......... (1,166) (24,912) (104,470) (253,503)
</TABLE>
Restricted cash represents the amount Golden Sky placed in escrow to fund
the first four scheduled interest payments on Golden Sky Systems' 12 3/8%
senior subordinated notes due 2006. It also includes $5.3 million as of
December 31, 1998 that was deposited with the administrative agent under Golden
Sky Systems' credit facility to fund a contingent reduction of availability
under the term loan facility. This contingent reduction did not occur as a
result of an amendment to Golden Sky Systems' credit facility.
EBITDA represents earnings before interest, taxes, depreciation and
amortization, non-cash charges, extraordinary items and non-recurring charges.
EBITDA is not a measure of performance under generally accepted accounting
principles and should not be construed as a substitute for consolidated net
income or loss as a measure of performance, or as a substitute for cash flow as
a measure of liquidity. Nevertheless, Golden Sky believes that EBITDA is a
commonly recognized measure of performance in the communications industry and
is the basis for many of Golden Sky's financial covenants. As a result,
investors may use this data to analyze and compare other communications
companies with Golden Sky in terms of operating performance, leverage and
liquidity. Further, Golden Sky believes that EBITDA provides useful information
regarding an entity's ability to incur and service debt. Changes in Golden
Sky's EBITDA may indicate changes in its free cash flows available to incur and
service debt and cover fixed charges. However, EBITDA is not intended to
represent cash flows for the period and should not be considered in isolation
or as a substitute for measures of performance determined in accordance with
generally accepted accounting principles. EBITDA, as Golden Sky calculates it,
is not necessarily comparable to similarly captioned amounts of other
companies.
Subscriber acquisition costs represent subscriber acquisition costs on a
per gross new subscriber activation basis. This excludes acquired subscribers
and does not net out disconnected subscribers.
10
<PAGE>
RISK FACTORS
The following factors should be considered carefully by the stockholders
of Pegasus in determining whether to vote in favor of the merger proposal.
Golden Sky's stockholders should be aware that ownership of Pegasus' Class A
common stock involves certain risks, including those described below, which
could adversely affect the value of their holdings of Class A common stock.
Pegasus does not make, nor has it authorized any other person to make, any
representation about the future market value of the Class A common stock. In
addition to the other information contained in this proxy statement/prospectus,
the following factors should be considered carefully in evaluating an
investment in the shares of Class A common stock offered hereby. The risk
factors relating to Golden Sky's direct broadcast satellite business are also
applicable to Pegasus. After the effective time of the merger, the risk factors
described under Risk Factors Relating to Golden Sky's Business will continue to
relate to Golden Sky in its capacity as a subsidiary of Pegasus.
Risks Associated With The Merger
Pegasus May Not Be Able to Arrange Financing In Order to Offer to Purchase
Golden Sky Notes
The merger will constitute a "change of control" of Golden Sky within the
meaning of the indentures governing Golden Sky's notes. This will require
Golden Sky to make an offer to the holders of Golden Sky's notes to purchase
those notes for 101% of their principal amount (approximately $310.2 million)
plus accrued interest. We have entered into a commitment letter with CIBC World
Markets Corp. under which CIBC World Markets agrees to purchase any and all
Golden Sky notes tendered in response to Golden Sky's offer to purchase. CIBC
World Markets' commitment is subject to the execution of definitive
documentation and customary closing conditions. If (i) Golden Sky's offer for
the notes is accepted by any of its noteholders, (ii) Golden Sky is unable to
purchase the notes, and (iii) we are unable to agree on definitive
documentation with CIBC World Markets or make alternative arrangements, then
Golden Sky may be in default under the terms of its indentures. Pegasus does
not intend to assume, guarantee or otherwise become liable under the Golden Sky
notes.
If Golden Sky is unable to purchase or arrange for the purchase of Golden
Sky's notes tendered in response to the offer to purchase, substantially all of
Golden Sky's indebtedness will be in default.
We May Not Be Able to Integrate Golden Sky's Operations Successfully
The anticipated benefits of the merger may not be achieved unless Golden
Sky's operations are combined successfully with ours in a coordinated, timely
and efficient manner. We cannot assure you that this will occur. Even if the
two companies' operations are integrated successfully, we cannot assure you
that the benefits anticipated by the merger will be achieved. The transition to
a combined company will require substantial attention from management. The
diversion of the attention of management and any difficulties encountered in
the transition process could have an adverse impact on the revenues and
operating results of the combined companies.
These difficulties will be increased by the fact that Pegasus and Golden
Sky will have separate and independent sources of debt financing and will be
subject to separate financial covenants and operating restrictions, each of
which limit transactions between Pegasus and Golden Sky. At a minimum such
transactions will have to be carried out on an arm's-length basis and with a
greater degree of formality than is normally the case for companies and their
wholly-owned subsidiaries. The Golden Sky credit facility prohibits all
transactions between Pegasus and Golden Sky except allocations of overhead and
other shared expenses. See The Merger -- Consequences Under Debt Agreements and
Preferred Stock Terms. These difficulties may also be increased by the
necessity of integrating personnel with disparate business backgrounds and
combining two different corporate cultures. In addition, the process of
combining the two organizations could cause the interruption of, or a loss of
momentum in, the activities of either or both of the companies' businesses,
which could have an adverse effect on their combined operations.
As a result of the uncertainties associated with such integration, we may
lose key management and other employees. Failure to achieve the anticipated
benefits of the merger or to integrate successfully the operations of the
companies could have a material adverse effect upon our business, operating
results and financial condition after the merger. Even if the benefits of the
merger are achieved and the two companies' operations
11
<PAGE>
are integrated successfully, we cannot assure you that our operating results
and financial condition after the merger will not be materially and adversely
affected by any number of economic, market or other factors that are not
related to the merger, including those described below.
We Will Incur Significant Transaction Expenses and Costs of Integration as
a Result of the Merger
Pegasus estimates that it will incur direct transaction costs, including
financial advisory, legal, accounting, registration and printing fees, of
approximately $1.9 million associated with the merger. In addition, following
the merger, Pegasus expects to incur additional expenses, which at this time
are not expected to exceed $2.0 million, relating to information systems
integration, promotional materials reflecting the merger, integration of
benefit plans, and travel and other costs relating to transitional planning and
implementation. These costs, except for any such costs which are capitalized,
are expected to be charged against our income in the fiscal period in which
they are incurred. We cannot assure you that we will not incur unforeseen
costs, which could be material, in subsequent periods to reflect additional
costs associated with the merger.
The Merger Will Have a Dilutive Effect on Our Earnings Per Share
The merger will be dilutive to our net income (loss) per share.
On a pro forma basis, the merger is dilutive to our net loss per share for
the year ended December 31, 1999. On a pro forma basis, giving effect to the
transactions described in the first paragraph of "Comparative Per Share Data"
as if they had occurred on the first day of 1999, our net loss per share for
such period was $11.84. On a pro forma basis, giving effect to the merger and
the transactions described in the first paragraph of "Comparative Per Share
Data" as if they had occurred on the first day of 1999, our net loss per share
for such period was $17.68, representing dilution of $5.84 per share as a
result of the merger. See Comparative Per Share Data. We cannot assure you that
the merger will not similarly dilute our net loss per share in the future.
Pegasus expects that, as a result of the merger, Golden Sky's intangible
assets will increase by approximately $968.9 million, which will be amortized
over a ten-year period resulting in a charge to earnings of approximately $96.9
million for each of the years in the period. Additionally, Pegasus expects to
incur a one-time restructuring charge of approximately $3.0 million in
connection with the merger.
Risks of Our Direct Broadcast Satellite Business
Satellite and Direct Broadcast Satellite Technology Could Fail or Be
Impaired
If any of the DIRECTV satellites is damaged or stops working partially or
completely for any of a number of reasons, DIRECTV customers would lose
programming. We would in turn likely lose customers, which could materially and
adversely affect our operations, financial performance and the trading price of
our Class A common stock.
Direct broadcast satellite technology is highly complex and is still
evolving. As with any high-tech product or system, it might not function as
expected. In particular, the satellites at the 101o W orbital location may not
last for their expected lives. In July 1998, DIRECTV reported that the primary
spacecraft control processor failed on DBS-1. As it was designed to do, the
satellite automatically switched to its on-board spare processor with no
interruption of service to DIRECTV subscribers. We cannot guarantee that a more
substantial failure of DIRECTV's direct broadcast satellite system will not
occur in the future. See -- We May Lose Our DIRECTV Rights After the Initial
Term of Our Agreements With the National Rural Telecommunications Cooperative
and Business of Pegasus -- Legal Proceedings.
Events at DIRECTV Could Adversely Affect Us
Because we are an intermediary for DIRECTV, events at DIRECTV that we do
not control can adversely affect us. One of the most important of these is
DIRECTV's ability to provide programming that appeals to mass audiences.
DIRECTV generally does not produce its own programming; it purchases it from
third parties. DIRECTV's success -- and therefore ours -- depends in large part
on DIRECTV's ability to make good judgments about programming sources and
obtain programming on favorable terms. We have no control or influence over
this.
12
<PAGE>
Programming Costs May Increase, Which Could Adversely Affect Our Direct
Broadcast Satellite Business
Programmers could increase the rates that DIRECTV pays for programming. As
a result, our costs would increase. This could cause us to increase our rates
and lose either customers or revenues.
The law requires programming suppliers that are affiliated with cable
companies to provide programming to all multi-channel distributors -- including
DIRECTV -- on nondiscriminatory terms. The rules implementing this law are
scheduled to expire in 2002. If they are not extended, these programmers could
increase DIRECTV's rates, and therefore ours. If we increase our rates, we may
lose customers. If we do not increase our rates, our costs, revenues and
financial performance could be adversely affected.
We May Lose Our DIRECTV Rights After the Initial Term of Our Agreements
With the National Rural Telecommunications Cooperative
We may or may not be able to continue in the DIRECTV business after the
current DIRECTV satellites are replaced. If we can continue, we cannot predict
what it will cost us to do so.
As part of a counterclaim in the litigation between the National Rural
Telecommunications Cooperative and DIRECTV, DIRECTV is seeking a declaratory
judgement that the term of the National Rural Telecommunications Cooperative's
agreement with DIRECTV is measured only by the orbital life of DBS-1, the first
DIRECTV satellite launched, and not the orbital lives of the other DIRECTV
satellites at the 101o W orbital location. According to DIRECTV, DBS-1 suffered
a failure of its primary control processor in July 1998 and since that time has
been operating normally using a spare control processor. If DIRECTV were to
prevail on its counterclaim, any failure of DBS-1 could have a material adverse
effect on our DIRECTV rights. While the National Rural Telecommunications
Cooperative has a right of first refusal to receive certain services from any
successor DIRECTV satellite, the scope and terms of this right of first refusal
are also being disputed in the litigation. This right is not expressly provided
for in our agreements with the National Rural Telecommunications Cooperative.
Our revenues and financial performance would be adversely affected if we are
not able to continue in the DIRECTV business for the reasons described above.
The Effect of New Federal Satellite Television Legislation on Our Business
Is Unclear
On November 29, 1999, the President signed the Satellite Home Viewer
Improvement Act of 1999. The Act contains provisions that will be phased in
over time. In addition, the FCC and other federal agencies have undertaken
rulemakings and studies in connection with this legislation. Therefore, we
cannot predict the effect of this new law on our business at this time.
The Act clarifies many of the issues involved in years of litigation
between the networks and the direct broadcast satellite industry regarding
retransmission of network programming to direct broadcast satellite
subscribers. Generally, it preserves the industry's right to retransmit distant
network programming to subscribers in "unserved" areas. It also extends through
December 31, 2004 the statutory right, for a copyright royalty fee, of the
industry to retransmit independent programming -- so-called superstations -- to
subscribers as "distant" signals. Further, satellite carriers will be permitted
to deliver signals only to households that cannot clearly receive over-the-air
network signals with a rooftop antenna.
Before this legislation was enacted, we had cut-off network programming to
approximately 159,000 of our subscribers in connection with settlement of the
litigation referred to above. We are unsure at this time how many of these
subscribers will be eligible and will want to receive network programming
services under this legislation.
Among other things, the Act directs the FCC to take actions to prescribe
the picture quality standard that the FCC uses to predict what households do
not receive a strong enough network broadcast signal over-the-air and therefore
are eligible to receive distant network signals. The FCC has initiated a
rulemaking proceeding to consider this standard. The effect on our business of
these FCC actions and other studies and rulemakings that the FCC will undertake
cannot be predicted at this time.
We Could Lose Money Because of Signal Theft
If signal theft becomes widespread, our revenues would suffer. Signal
theft has long been a problem in the cable and direct broadcast satellite
industries. DIRECTV uses encryption technology to prevent people from receiving
programming without paying for it. The technology is not foolproof and there
have been published reports that it has been compromised.
13
<PAGE>
We Could Lose Revenues if We Have Out-of-Territory Subscribers
Just as we have exclusive DIRECTV distribution rights in our territories,
we are not allowed to have customers outside our territories. The problem is
that customers are not always truthful about where they live. If it turns out
that large numbers of our subscribers are not in our territories, we would lose
substantial revenues when we disconnect them. We could also face legal
consequences for having subscribers in Canada, where DIRECTV reception is
illegal.
Direct Broadcast Satellite Services Face Competition from Cable Operators
One of the competitive advantages of direct broadcast satellite systems is
their ability to provide customers with more channels and a better-quality
digital signal than traditional analog cable television systems. Many cable
television operators are making significant investments to upgrade their
systems from analog to digital. This upgrade will significantly increase the
number of channels that cable television operators can provide to their
customers and the quality of the transmission. In addition, many cable
television operators are upgrading their systems to provide their customers
with high-speed Internet access. These upgrades could make cable television a
more attractive alternative for consumers, which could have an adverse effect
on our direct broadcast satellite business.
Direct Broadcast Satellite Equipment Shortages Could Adversely Affect Our
Direct Broadcast Business
There have been periodic shortages of direct broadcast satellite equipment
and there may be such shortages in the future. During such periods, we may be
unable to accept new subscribers and, as a result, potential revenue could be
lost. If we are unable to obtain direct broadcast satellite equipment in the
future, or if we cannot obtain such equipment on favorable terms, our
subscriber base and revenues could be adversely affected.
Risks of Our Broadcast Television Business
Our Broadcast Operations Could Be Adversely Affected if We Fail To
Negotiate Successfully Our Network Affiliation Agreements
Our network affiliation agreements with Fox formally expired on January
30, 1999 (other than the affiliation agreement for television station WTLH,
which is scheduled to expire on December 31, 2000). Except in the case of WTLH,
we currently broadcast Fox programming under arrangements between Pegasus and
Fox which have generally conformed in practice to such affiliation agreements,
and we are in the process of negotiating new affiliation agreements. If we are
not successful in these negotiations, our broadcast operations could suffer
materially.
Fox Could Cancel Our Affiliation Agreements if It Acquires a Significant
Ownership Interest in One of Our Markets
In addition, if Fox acquires a significant ownership interest in another
station in one of our markets, it can cancel our affiliation agreement or
arrangement for that market without penalty. Fox has done this in the past to
other broadcasters.
Our Broadcast Operations Could Be Adversely Affected if the FCC Prevents
Our Local Marketing Agreement Strategy
One of our important strategies in broadcast television is to achieve
economies of scale by programming two stations in each of our markets. Because
the FCC did not allow a broadcaster to own more than one television station in
the same market, we implemented our strategy -- like other broadcasters --
through arrangements known as local marketing agreements. Under these
arrangements, we contracted to provide programming and other services to the
licensee of a separate television station in the market. We currently have
local marketing agreements for second stations in three of our markets and our
only station in another market is programmed through a local marketing
agreement. We intend to program a second station under such an agreement in one
more market in 2000 if permitted by the FCC.
14
<PAGE>
In August 1999, the FCC revised its television ownership rules to permit,
in certain circumstances, the common ownership of two stations in a television
market. The FCC also decided to treat most television local marketing
agreements as if the station providing programming owned the programmed
station. These decisions would generally prohibit us from programming or
acquiring additional in-market stations in our current markets and could also
require us to terminate some of our existing local marketing agreements by
August 2001. We will vigorously seek to obtain favorable rulings from the FCC
to preserve and expand our broadcast television strategy through the
grandfathering of our existing arrangements or outright common ownership.
Unfavorable decisions by the FCC, however, could cost us significant revenues
and could affect our broadcast operations materially and adversely.
Antitrust Laws Could Limit Our Local Marketing Agreement Strategy
Apart from the FCC, federal agencies that administer the antitrust laws
have said they intend to review market concentrations in television, including
through local marketing agreements that the FCC permits. These agencies could
limit partially or altogether our ability to program stations through local
marketing agreements. We cannot predict how this will affect us.
Our Inability To Control Licensees Under Our Local Marketing Agreements
Could Adversely Affect Our Broadcast Operations
Even if we can keep or expand our local marketing agreements, their use
carries the inherent risk that we do not control the other parties that
actually own the stations and hold the stations' FCC licenses. It is
conceivable that the licensee could pre-empt our programming. In an extreme
case, the licensee could cease to meet FCC qualifications and put its license
in jeopardy, in which case, we could lose the ability to program the station.
The Planned Industry Conversion to Digital Television Could Adversely
Affect Our Broadcast Business
All commercial television stations in the United States must start
broadcasting in digital format by May 2002 and must abandon the present analog
format by 2006, though the FCC may extend these dates.
o It will be expensive to convert from the current analog format to digital
format. We cannot now determine what that cost will be.
o The digital technology will allow us to broadcast multiple channels,
compared to only one today. We cannot predict whether or at what cost we
will be able to obtain programming for the additional channels. Increased
revenues from the additional channels may not make up for the conversion
cost and additional programming expenses. Also, multiple channels
programmed by other stations could increase competition in our markets.
o The FCC has generally made available much higher power allocations to
digital stations that will replace stations on existing channels 2 through
13 than digital stations that will replace existing channels 14 through
69. All of our existing stations are on channels 14 through 69. This power
disparity could put us at a disadvantage to our competitors that now
operate on channels 2 through 13.
o In some cases, when we convert a station to digital television, the
signal may not be received in as large a coverage area, or it may suffer
from additional interference. Also, because of the technical standards
adopted by the FCC, the digital signal may be subject to interference to a
greater degree than current analog transmissions. As a result, viewers
using antennas located inside their homes, as opposed to outdoor, rooftop
antennas, may not receive a reliable signal. If viewers do not receive a
high-quality, reliable signal from our stations, they may be encouraged to
seek service from our competitors.
o The FCC is considering whether to require cable companies to carry both
the analog and the digital signals of their local broadcasters when
television stations will be broadcasting both, during the transition
period between 2002, at the latest, and 2006. If the FCC does not require
this, cable customers in our broadcast markets may not receive our digital
signal, which could affect us unfavorably.
15
<PAGE>
The New Federal Satellite Television Legislation Could Adversely Affect
Our Broadcast Business
The Satellite Home Viewer Improvement Act of 1999 could have an adverse
effect on our broadcast stations' audience share and advertising revenues.
This legislation may allow satellite carriers to provide the signal of
distant stations with the same network affiliation as our stations to more
television viewers in our markets than would have been permitted under previous
law. In addition, the legislation allows satellite carriers to provide local
television signals by satellite within a station market, but does not require
satellite carriers to carry all local stations in a market until 2002.
Satellite carriers could decide to carry other stations in our markets, but not
our stations, which could adversely affect our stations' audience share and
revenues.
Risks of Our Cable Business
We Could Lose Revenues Because of Our Geographic Concentration in Puerto
Rico
All of our cable operations are in Puerto Rico. This geographic
concentration carries risks:
o Puerto Rico gets more hurricanes and other severe weather than many other
places. Because of Hurricane Georges, which struck Puerto Rico in
September 1998, we lost $1.4 million of revenue in the fourth quarter of
1998 alone, and we spent about $300,000 to repair the damage. Future
hurricanes can be expected and could be even worse for us.
o A local downturn in the Puerto Rico economy could cause us to lose
revenues from subscribers and advertisers. This would affect our cable
business more seriously than if we were more geographically diversified.
o A material adverse change in our Puerto Rice cable operations could
affect our ability to sell our cable systems at all or for the
consideration agreed upon in the letter of intent relating to the sale of
our cable business.
The FCC's Digital Television Requirements May Prevent Us from Expanding Our
Cable Programming
The FCC's digital television rules may cause us to lose customers and
revenues. We mentioned above that the FCC is considering whether to require
cable companies to carry both the analog and digital signals of local
television stations during the transition to digital broadcasting. See Risks of
Our Broadcast Television Business -- The Planned Industry Conversion to Digital
Television Could Adversely Affect Our Broadcast Business. Because we have only
so much channel capacity in our cable system, this requirement could hurt our
ability to expand our programming offerings. If we cannot expand programming
offerings, we may lose customers and revenues.
We Could Become Subject to Rate Regulation Which Could Reduce Our Cable
Revenues
We may lose revenues if we become subject to rate regulation. The
government can regulate the rates cable companies charge for the lowest level
of their service. The government does not now regulate our rates since the FCC
has found that our cable systems are subject to effective competition. This
means that less than 30% of the people that could subscribe to the systems do
subscribe. But if we are successful in significantly increasing the percentage
of people that subscribe to our service, the lowest level of cable service we
offer could become subject to rate regulation. If so, we might have to reduce
our cable rates, resulting in decreased revenues. If our cable systems become
subject to rate regulation, we may not be able to sell our cable systems at all
or for the consideration agreed upon in the letter of intent relating to the
sale of our cable business.
Other Risks of Our Business
We Face Certain Other Regulatory Risks
The direct broadcast satellite, television broadcast, and cable industries
are subject to regulation by the FCC under the Communications Act of 1934 and,
to a certain extent, by state and local authorities. Proceedings to implement
the Communications Act are on-going, and we cannot predict the outcomes of
these
16
<PAGE>
proceedings or their effect on our business. We depend on broadcast licenses
from the FCC to operate our broadcast station, and DIRECTV depends on FCC
licenses to operate its digital broadcast satellite service. If the FCC
cancels, revokes, suspends, or fails to renew any of these licenses, it could
have a harmful effect on us.
We Have a History of Substantial Losses; We Expect Them To Continue; Losses
Could Adversely Affect Our Stock Price and Access to Capital Markets
We have never made a profit, except in 1995, when we had a $10.2 million
extraordinary gain. Because of interest expense on our substantial debt and
because of high expense in amortizing goodwill from our acquisitions, we do not
expect to have net income for the foreseeable future. To the extent investors
measure our performance by net income or loss, rather than alternative measures
based on cash flow, continuing losses could adversely affect our access to
capital markets and the trading price of our Class A common stock.
We Face Significant Competition; the Competitive Landscape Changes
Constantly
Our direct broadcast satellite business faces competition from other
current or potential multi-channel programming distributors, including other
direct broadcast satellite operators, direct-to-home distributors, cable
operators, wireless cable operators, Internet and local and long-distance
telephone companies, which may be able to offer more competitive packages or
pricing than we or DIRECTV can provide. In addition, the direct broadcast
satellite industry is still evolving and recent or future competitive
developments could adversely affect us.
Our TV stations compete for audience share, programming and advertising
revenue with other television stations in their respective markets and with
direct broadcast satellite operators, cable operators and other advertising
media. Direct broadcast satellite and cable operators in particular are
competing more aggressively than in the past for advertising revenues in our TV
stations' markets. This competition could adversely affect our stations'
revenues and performance in the future.
Our cable systems face competition from television stations, satellite
master antennae television systems, wireless cable systems, direct-to-home
distributors, direct broadcast satellite systems and open video systems.
In addition, the markets in which we operate are in a constant state of
change due to technological, economic and regulatory developments. We are
unable to predict what forms of competition will develop in the future, the
extent of such competition or its possible effects on our businesses.
Our Acquisition Strategy May Become Too Expensive Which Could Adversely
Affect Our Financial Performance
We may not be able to keep making acquisitions on attractive terms. If we
cannot continue to make acquisitions on attractive terms, our financial
performance and stock price could suffer.
If we pay for an acquisition with our stock, the acquisition could dilute
existing stockholders, depending on its terms. If we finance an acquisition by
borrowing, this would increase our already high leverage and interest expense.
We May Not Be Able To Get the Consents Necessary To Implement Our
Acquisition Strategy
We have been able to get the necessary consents to make acquisitions in
the past, but this could change, or become more difficult, or require us to
incur additional costs, for reasons we cannot predict. Our acquisitions
normally require third-party consents that we do not control. These include the
consents of DIRECTV and the National Rural Telecommunications Cooperative for
direct broadcast satellite acquisitions, the FCC and the television networks
for broadcast TV acquisitions, and cable franchising authorities and
programmers for cable acquisitions. Some acquisitions also require the consent
of our lenders.
We May Not Be Able To Integrate Acquired Companies Successfully Which Could
Affect Our Financial Performance
We could encounter difficulties integrating any given acquired business
into our operations. These difficulties can cost money and divert management's
attention from other important matters.
17
<PAGE>
Our Credit Arrangements and Publicly Held Debt and Preferred Stock Limit
Our Ability to Pay Dividends on Our Class A Common Stock
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. In addition, our publicly held debt securities and
preferred stock restrict our ability to pay cash dividends on our common stock.
Moreover, we are a holding company, and our ability to pay dividends is
dependent upon the receipt of dividends from our direct and indirect
subsidiaries. The Pegasus Media & Communications credit facility imposes
substantial restrictions on Pegasus Media & Communications' ability to pay
dividends to us. When the merger closes, Golden Sky's credit facility and other
publicly held debt will restrict Golden Sky's ability to pay dividends to us.
Marshall W. Pagon Owns and Controls Most of the Voting Power of Pegasus
Marshall W. Pagon, our President, Chief Executive Officer and Chairman of
the Board, through his beneficial ownership of Class A common stock and all of
our Class B common stock, will have 67.7% of the combined voting power of the
outstanding common stock after giving effect to the merger.
Our voting common stock is divided into two classes with different voting
rights. Holders of Class A common stock are entitled to one vote per share on
all matters submitted to a vote of stockholders generally, and holders of Class
B common stock are entitled to ten votes per share. Both classes vote together
as a single class on all matters except in connection with certain amendments
to our Amended and Restated Certificate of Incorporation, the authorization or
issuance of additional shares of Class B common stock, and except where class
voting is required under the Delaware General Corporation Law. As a result of
Mr. Pagon's beneficial ownership of all the outstanding voting stock of the
sole general partner of a limited partnership that indirectly controls our
parent company and of his control of the other holders of Class B common stock,
Mr. Pagon beneficially owns all of our Class B common stock. After giving
effect to the greater voting rights attached to the Class B common stock and
the shares of Class A common stock to be issued in the merger, Mr. Pagon will
have sufficient power, without the consent of the holders of the Class A common
stock, to elect Pegasus' entire board of directors. Mr. Pagon will also have
sufficient power to determine the outcome of other matters submitted to the
stockholders for approval, including a merger, consolidation, tender offer, or
other business combination or change of control involving Pegasus that some or
a majority of our stockholders might consider to be in their best interests.
In connection with the merger, Mr. Pagon, certain of Golden Sky's
stockholders and certain former stockholders of Digital Television Services,
Inc. will enter into a voting agreement providing for the designation and
election of directors. See The Merger -- Voting Agreement.
Except as required under the Delaware General Corporation Law and the
applicable certificate of designation, holders of the non-voting common stock
and preferred stock have no voting rights.
Our Stock Price Has Been Volatile
There may be significant volatility in the market price of our Class A
common stock due to factors that may or may not relate to Pegasus' performance.
The market price of the Class A common stock may be significantly affected by
various factors such as economic forecasts, financial market conditions,
acquisitions and quarterly variations in Pegasus' results of operations.
Our Certificate of Incorporation and Publicly Held Debt and Preferred Stock
Could Delay, Deter or Prevent a Change of Control of Pegasus
Provisions in our amended and restated certificate of incorporation and
the Delaware General Corporation Law could serve to delay, deter or prevent a
merger, consolidation, tender offer, or other business combination or change of
control involving Pegasus. However, some or a majority of our stockholders
might consider these actions to be in their best interests, including tender
offers or attempted takeovers that might otherwise result in our stockholders
receiving a premium over the market price for the Class A common stock.
18
<PAGE>
Our amended and restated certificate of incorporation contains, among
other things, provisions authorizing the issuance of "blank check" preferred
stock and two classes of voting common stock with different voting rights. We
are also subject to the provisions of Section 203 of the Delaware General
Corporation Law. These provisions could delay, deter or prevent a merger,
consolidation, tender offer, or other business combination or change of control
involving Pegasus that some or a majority of our stockholders might consider to
be in their best interests.
In addition, restrictions associated with our publicly held debt
securities, Series A preferred stock and Series C convertible preferred stock
limit our ability to enter into a "change of control" transaction. If a change
of control occurs:
o we would be required to offer to purchase all of our publicly held debt
securities then outstanding at 101% of the aggregate principal amount plus
accrued and unpaid interest, if any;
o we would be required to offer to purchase all of the shares of our Series
A preferred stock then outstanding at 101% of the liquidation preference
thereof plus, without duplication, accumulated and unpaid dividends to the
repurchase date; and
o if the market price per share of our Class A common stock at that time
was less than the conversion price of our Series C convertible preferred
stock, the holders of the Series C convertible preferred stock would have
a one-time option to convert their shares into shares of our Class A
common stock at a conversion price equal to the greater of the market
price per share of our Class A common stock as of the date of the change
of control or $68.00 per share. This could be dilutive to the holders of
our common stock.
The repurchase price for the publicly held debt securities and Series A
preferred stock is payable in cash. In the case of the Series C convertible
preferred stock, we may, at our option, make a cash payment equal to the market
value of the shares of our Class A common stock otherwise issuable. We cannot
assure you that, were a change of control to occur, we would have sufficient
funds to pay the cash repurchase price for those securities which we might be
required to purchase. We cannot assure you that our subsidiaries would be
permitted by the terms of their outstanding indebtedness, including pursuant to
the Pegasus Media & Communications credit facility, to pay dividends to us to
permit us to repurchase the publicly held debt securities and preferred stock,
as applicable. Any such dividends are currently prohibited. In addition, any
change of control transaction may also be a change of control under Pegasus
Media & Communications' credit facility, which would require Pegasus Media &
Communications to prepay all amounts owing under its credit facility and to
reduce the commitments thereunder to zero. If we do not have sufficient funds
to pay the repurchase price of our outstanding publicly held debt securities,
Series A preferred stock and Series C convertible preferred stock, as the case
may be, upon a change of control, we could be required to seek third party
financing to the extent we do not have sufficient funds available to meet our
repurchase obligations. We cannot assure you assure you that we would be able
to obtain such financing on favorable terms, if at all. In addition, any change
of control would be subject to the prior approval of the FCC.
The Year 2000 Problem Could Adversely Affect Us
For a description of year 2000 risks applicable to Pegasus see Pegasus
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Year 2000.
We May Not Be Aware of All Risks
These risks and uncertainties are not the only ones we face. Others that
we do not know about now, or that we do not now think are important, may impair
our business or the trading price of our Class A common stock.
Risk Factors Relating to Golden Sky's Business
In addition to the risk factors described under Risks of Our Direct
Broadcast Satellite Business and certain portions of the risk factors entitled
Other Risks of Our Business -- We Face Certain Other Regulatory Risks, and --
We Face Significant Competition; the Competitive Landscape Changes Constantly
which relate to the direct broadcast satellite business and, as a consequence,
would be applicable to both Pegasus and Golden Sky, the following risk factors
relate to Golden Sky.
19
<PAGE>
Golden Sky Has A Limited Operating History and History of Negative Cash
Flow
Golden Sky has operated for only a limited period of time. During that
time, it has generated both net losses and negative earnings before interest,
taxes, depreciation and amortization, non-cash charges, extraordinary items,
and non-recurring charges. Golden Sky had a net loss of approximately $64.7
million for the year ended December 31, 1998 and a net loss of approximately
$131.3 million for the year ended December 31, 1999. Golden Sky also reported
negative earnings before interest, taxes, depreciation and amortization,
non-cash charges, extraordinary items and non-recurring charges of
approximately $20.0 million for the year ended December 31, 1998 and
approximately $48.3 million for the year ended December 31, 1999. The extent to
which Golden Sky generates net income or positive earnings before interest,
taxes, depreciation and amortization, non-cash charges, extraordinary items and
non-recurring charges in the future will depend upon a number of factors, many
of which are beyond its control.
There can be no assurance that Golden Sky will be able to generate or
sustain net income or positive earnings before interest, taxes, depreciation
and amortization, non-cash charges, extraordinary items and non-recurring
charges in the future, or if so, when. To the extent investors measure Golden
Sky's performance by net income or loss, rather than alternative measures based
on cash flow, continuing losses could adversely affect its ability to raise
additional capital to finance its business plan.
Golden Sky May Not Be Able To Make Principal or Interest Payments on Its
Substantial Debt
Golden Sky had debt of $369.4 million as of December 31, 1999. Golden
Sky's ability to make payments of principal and interest on its debt will be
largely dependent upon its future operating performance. Such operating
performance will be affected by many factors, some of which may be beyond
Golden Sky's control, such as prevailing economic conditions. There can be no
assurance that Golden Sky will be able to generate sufficient cash flow to
service required interest and principal payments on its debt. In addition,
borrowings under Golden Sky Systems' credit facility bear interest at variable
rates. This makes Golden Sky vulnerable to increases in interest rates
generally. If Golden Sky does not have sufficient available resources to repay
its indebtedness, it may find it necessary to refinance such indebtedness.
There can be no assurance that such refinancing would be available, or
available on reasonable terms. See Golden Sky Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources.
Golden Sky's Substantial Debt Could Adversely Affect Its Ability to
Execute Its Business Strategy
Golden Sky's debt instruments contain numerous restrictive covenants that
limit its discretion with respect to the operation of its business. Among other
things, these covenants limit Golden Sky's ability, and the ability of its
subsidiaries, to incur substantial indebtedness, make investments, loans or
advances, pay dividends or distributions, make capital expenditures or
consolidate, merge or transfer all or substantially all of their assets. Golden
Sky may be unable to pursue attractive business opportunities due to these
restrictive covenants. Moreover, Golden Sky's financial flexibility may be
limited by these requirements.
If Golden Sky Fails to Comply With the Restrictive Covenants of Its Debt
Instruments, Its Debt Could Be Accelerated and There May Be Insufficient
Assets to Meet Its Obligations
Golden Sky Systems' credit facility requires it to meet specified
financial ratios and financial conditions. Events beyond its control may affect
its ability to meet these covenants and conditions. In the past, Golden Sky
Systems has failed to meet certain of these covenants and conditions. As a
result, Golden Sky Systems has had to seek and obtain amendments to its credit
facility in order to waive these defaults. There is no assurance that Golden
Sky Systems will be able to obtain future waivers in connection with future
defaults, if any.
If Golden Sky fails to comply with its obligations under its debt
instruments, the holders of the debt could elect to declare all amounts
outstanding under the relevant instruments to be immediately due and payable.
The assets of the relevant Golden Sky entity may not be sufficient to repay its
debt if the holders elect to accelerate the debt.
Golden Sky May Not Have Enough Capital to Execute Its Business Strategy
Golden Sky's operations require and will continue to require substantial
capital. Its actual cash requirements may materially exceed its estimated
capital requirements and available capital. The amount of capital Golden Sky
will require will depend upon a number of factors, including the necessity of
future capital
20
<PAGE>
expenditures and the extent of its future negative cash flow. If Golden Sky
Systems does not comply with the financial and operating covenants under its
credit facility described above, it may be unable to borrow funds under the
credit facility. In addition, Golden Sky Systems may require capital in excess
of amounts available under its credit facility. Under these circumstances,
Golden Sky will be required to obtain additional capital to continue to develop
its operations. Golden Sky might not be able to secure the additional capital
on satisfactory terms, or at all.
Any Change in Golden Sky's Relationship With the National Rural
Telecommunications Cooperative or the National Rural Telecommunications
Cooperative's Relationship With DIRECTV Could Adversely Affect Its Ability
to Earn Revenues
Golden Sky has the exclusive right to distribute DIRECTV programming in
its markets through agreements with the National Rural Telecommunications
Cooperative, which has agreements relating to such rights with Hughes
Electronics Corporation. Because Golden Sky does not have a direct contractual
relationship with Hughes, it relies upon the National Rural Telecommunications
Cooperative to provide Golden Sky with accurate information concerning the
relationship with DIRECTV and perform diligently all of its obligations under
its agreement with Hughes, as well as to pursue any rights and remedies,
including cure rights, that it may have against Hughes.
Golden Sky's Ability to Earn Revenues and Its Operating Costs Could Be
Adversely Affected If the National Rural Telecommunications Cooperative Is
Unable to Provide It With Essential Support Services and Accurate
Subscriber Information
Golden Sky's agreements with the National Rural Telecommunications
Cooperative require that it use the National Rural Telecommunications
Cooperative for certain support services, and that Golden Sky pay the National
Rural Telecommunications Cooperative specified fees for these support services.
These services are important to the operation and management of Golden Sky's
business. If the National Rural Telecommunications Cooperative is unable to
provide Golden Sky with support services for whatever reason, it would be
required to acquire these services from other sources or provide them for
itself. Golden Sky's cost of acquiring these services elsewhere or providing
them internally could exceed amounts payable under its agreements with the
National Rural Telecommunications Cooperative. Moreover, it is possible that
Golden Sky would be able to secure these services on a more economic basis from
other persons while it remains obligated to secure them from the National Rural
Telecommunications Cooperative.
The National Rural Telecommunications Cooperative May Not Act in Golden
Sky's Best Interests, Which Could Adversely Affect Its Rights and Costs of
Distributing DIRECTV Programming in Its Markets
The National Rural Telecommunications Cooperative is a cooperative whose
members are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the United States. Because Golden Sky
does not qualify as a member of the National Rural Telecommunications
Cooperative, it acts as a non-voting affiliate. From time to time, the National
Rural Telecommunications Cooperative may act solely in the interests of its
members whose interests may conflict with Golden Sky's interests. There can be
no assurance that the National Rural Telecommunications Cooperative will act in
a manner that will preserve Golden Sky's ability to offer DIRECTV programming
on a basis consistent with past practice.
Changes in National Rural Telecommunications Cooperative Policies May
Adversely Affect Golden Sky's Ability to Provide DIRECTV Programming in Its
Markets
Golden Sky must comply with certain policies of the National Rural
Telecommunications Cooperative adopted from time to time. In the past, Golden
Sky and other National Rural Telecommunications Cooperative-affiliated DIRECTV
providers have disputed policies proposed by the National Rural
Telecommunications Cooperative that Golden Sky believed did not comply with its
agreements with the National Rural Telecommunications Cooperative and
applicable law. For example, Golden Sky has differed with the National Rural
Telecommunications Cooperative, as have other affiliates, over the nature of
its rights to the information and data regarding its subscribers. In the event
that Golden Sky's rights to offer DIRECTV programming through the National
Rural Telecommunications Cooperative are terminated or expire, its rights to
subscriber information will be critical to its ability to execute its business
strategy.
21
<PAGE>
Recent Consolidation Among Direct Broadcast Satellite Operators and Related
Litigation Could Adversely Affect Golden Sky's DIRECTV Programming Rights,
Costs of Providing Programming to Subscribers and Capital Requirements
Until recently, DIRECTV, United States Satellite Broadcasting Company,
Primestar, Inc. and EchoStar Communications Corporation were the principal
domestic satellite television operations, serving over 80% of satellite
television subscribers in the United States. Hughes, which owns DIRECTV,
recently acquired both Primestar and USSB. After completing its acquisition of
USSB, DIRECTV expanded its programming lineup through the addition of USSB's
premium channels, consisting of HBO, Showtime, Cinemax and The Movie Channel,
and has refused to make these channels available to National Rural
Telecommunications Cooperative members and affiliates for distribution in their
rural markets. The National Rural Telecommunications Cooperative has filed suit
against DIRECTV and Hughes alleging that they have breached the National Rural
Telecommunications Cooperative's agreement with Hughes by failing to provide
the National Rural Telecommunications Cooperative with the exclusive, or
alternatively the non-exclusive, right to distribute this premium programming.
It is possible that Hughes' acquisition of USSB and the related litigation will
adversely impact the business relationship between the National Rural
Telecommunications Cooperative and DIRECTV and therefore Golden Sky's ability
to continue to provide DIRECTV programming in its rural markets.
On January 10, 2000, Pegasus and Golden Sky filed a class action lawsuit
in federal court in Los Angeles against DIRECTV as representatives of a
proposed class that would include all members and affiliates of the National
Rural Telecommunications Cooperative that are distributors of DIRECTV. The
complaint contains causes of action for various torts, common counts and
declaratory relief based on DIRECTV's failure to provide the National Rural
Telecommunications Cooperative with premium programming, thereby preventing the
National Rural Telecommunications Cooperative from providing this programming
to the class members and affiliates. The claims are also based on DIRECTV's
position with respect to launch fees and other benefits, term and rights of
first refusal. The complaint seeks monetary damages and a court order regarding
the rights of the National Rural Telecommunications Cooperative and its members
and affiliates.
On February 10, 2000, Pegasus and Golden Sky filed an amended complaint,
which added new tort claims against DIRECTV for interference with plaintiffs'
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. Pegasus and Golden Sky also withdrew the class action
allegations to allow a new class action to be filed on behalf of the members
and affiliates of the National Rural Telecommunications Cooperative. The
outcome of this litigation and the litigation filed by the National Rural
Telecommunications Cooperative could have a material adverse effect on the
scope and duration of Golden Sky's right to provide DIRECTV programming in its
rural markets, its capital requirements and its costs of operations.
It is also possible that Hughes' acquisition of Primestar will increase
Golden Sky's costs of providing services and require that it seek additional
capital. As a result of Golden Sky's exclusive distribution rights, former
Primestar subscribers who are located in its rural markets and choose to
receive DIRECTV programming will become its subscribers. While Golden Sky
cannot predict the ultimate impact of this acquisition on its business,
increased costs associated with its efforts to convert former Primestar
subscribers to its DIRECTV service could adversely affect its results of
operations in the near term. Hughes' acquisitions of USSB and Primestar also
could encourage EchoStar to respond by lowering prices or increasing its
marketing activities, which could increase Golden Sky's marketing costs or
cause it to lose revenues as a result of increased competition for its
subscribers.
Risk That Forward-Looking Statements May Prove Inaccurate
This proxy statement/prospectus contains certain statements and
information that are "forward-looking statements" within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act. We and Golden
Sky use words such as "anticipate," "believe," "estimate," "expect," "intend,"
"project," "should" and similar expressions to identify forward looking
statements. Those statements include, among other things, the discussions of
our respective business strategies and expectations concerning our respective
market positions, future operations, margins, profitability, liquidity and
capital resources, as well as statements
22
<PAGE>
concerning the integration of our acquisitions and related achievement of cost
savings and other synergies. We caution you that reliance on any
forward-looking statement involves risks and uncertainties, and that although
we believe and Golden Sky believes that the assumptions on which our
forward-looking statements are based are reasonable, any of those assumptions
could prove to be inaccurate, and, as a result, the forward-looking statements
based on those assumptions also could be incorrect. The uncertainties in this
regard include, but are not limited to, those identified in the risk factors
discussed above. In light of these and other uncertainties, you should not
conclude that we or Golden Sky will necessarily achieve any plans and
objectives or projected financial results referred to in any of the
forward-looking statements. Neither we nor Golden Sky undertakes to release the
results of any revisions of these forward-looking statements to reflect future
events or circumstances.
23
<PAGE>
COMPARATIVE PER SHARE DATA
Set forth below are unaudited losses before extraordinary items per common
share, cash dividends declared and book value per common share data of Pegasus
and Golden Sky on both historical and pro forma combined bases. Pegasus -- Pro
Forma -- Transactions loss before extraordinary items per share is derived from
the pro forma information presented elsewhere in this proxy
statement/prospectus, which gives effect to:
o the pending sale of our Puerto Rico cable systems;
o the closing of the new Pegasus Media & Communications credit facility;
and
o the Series C convertible preferred stock offering, all as if they had
occurred at the beginning of 1999, with respect to income from operations
and cash dividends, and as of December 31, 1999 for book value data.
Golden Sky -- Equivalent Pro Forma share information is based on an
estimate of 6,426,000 shares of Pegasus' Class A common stock to be issued in
connection with the merger, including options and warrants to purchase Pegasus'
common stock, after giving effect to all required reductions under the merger
agreement, other than the reduction for the up to $25.0 million in Golden Sky
capital stock that may be purchased by Pegasus for cash before the merger. See
The Merger -- The Merger Agreement -- Conversion Ratios.
Pegasus -- Pro Forma -- Transactions and Merger loss before extraordinary
items per share is derived from the pro forma information presented elsewhere
in this proxy statement/prospectus, which gives effect to the transactions
noted above and the merger as if they had occurred at the beginning of 1999,
with respect to income from operations and cash dividends, and as of December
31, 1999 for book value data. The information set forth below should be read in
conjunction with the respective audited financial statements of Pegasus and
Golden Sky and the notes to these financial statements, pro forma consolidated
financial information and other financial information included elsewhere in
this proxy statement/prospectus.
A substantial portion of the shares of Pegasus' Class A common stock to be
issued in the merger are in exchange for various convertible preferred shares,
warrants and options of Golden Sky. Accordingly, per share information of
Golden Sky below under Golden Sky -- Historical gives effect to the conversion
of these Golden Sky equity securities into common stock of Golden Sky.
24
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31, 1999
--------------------------------------
(In thousands, except per share data)
<S> <C>
Pegasus -- Historical:
Loss before extraordinary items .......................... $ (195,341)
Weighted average common shares outstanding ............... 18,875
Loss per common share before extraordinary items ......... $ (10.35)
Cash dividends ........................................... --
Golden Sky -- Historical:
Loss before extraordinary items .......................... $ (128,332)
Weighted average common shares outstanding ............... 733
Loss per common share before extraordinary items ......... $ (175.15)
Cash dividends ........................................... --
Pegasus -- Pro Forma -- Transactions:
Loss before extraordinary items .......................... $ (226,951)
Weighted average common shares outstanding ............... 19,075
Loss per common share before extraordinary items ......... $ (11.90)
Cash dividends ........................................... --
Golden Sky -- Equivalent Pro Forma:
Loss per common share before extraordinary items ......... $ (19.97)
Cash dividends ........................................... --
Pegasus -- Pro Forma -- Transactions and Merger:
Loss before extraordinary items .......................... $ (452,174)
Weighted average common shares outstanding ............... 25,575
Loss per common share before extraordinary items ......... $ (17.68)
Cash dividends ........................................... --
Pegasus -- Historical:
Common shareholders' deficit ............................. $ (63,127)
Common shares outstanding ................................ 19,798
Book value per common share .............................. $ (3.19)
Golden Sky -- Historical:
Common shareholders' deficit ............................. $ (253,503)
Common shares outstanding ................................ 794
Book value per common share .............................. $ (319.24)
Pegasus -- Pro Forma -- Transactions:
Common shareholders' equity .............................. $ 117,708
Common shares outstanding ................................ 19,998
Book value per common share .............................. $ 5.89
Golden Sky -- Equivalent Pro Forma:
Book value per common share .............................. $ (39.45)
Pegasus -- Pro Forma -- Transactions and Merger:
Common shareholders' equity .............................. $ 620,512
Common shares outstanding ................................ 26,498
Book value per common share .............................. $ 23.42
</TABLE>
25
<PAGE>
MARKET PRICE INFORMATION AND DIVIDENDS
Pegasus
Price Range of Class A Common Stock
Our Class A common stock is traded on the Nasdaq National Market under the
symbol "PGTV." The sale prices reflect inter-dealer quotations, do not include
retail markups, markdowns or commission, and do not necessarily represent
actual transactions. We urge you to obtain current market quotations. The stock
prices listed below represent the high and low closing sale prices of the Class
A common stock, as reported on the Nasdaq National Market since January 1,
1998.
<TABLE>
<CAPTION>
Price Range of Common
Stock
---------------------
High Low
-------- ----------
<S> <C> <C>
Year Ended December 31, 1998:
First Quarter ................................... 26 19 7/8
Second Quarter .................................. 25 5/8 20 7/8
Third Quarter ................................... 25 15 7/8
Fourth Quarter .................................. 25 1/2 10 5/8
Year Ended December 31, 1999:
First Quarter ................................... 28 7/8 21 3/16
Second Quarter .................................. 50 1/2 27 7/8
Third Quarter ................................... 46 37
Fourth Quarter .................................. 102 3/4 42 1/2
Year Ended December 31, 2000:
First Quarter through February 24, 2000 ......... 141 7/8 83 15/16
</TABLE>
The closing sale price of the Class A common stock was $118 5/8 on February
24, 2000. As of February 25, 2000, Pegasus had 152 shareholders of record.
Dividend Policy
Common Stock: Pegasus has not paid any cash dividends on its Class A
common stock and does not anticipate paying cash dividends on its common stock
in the foreseeable future. Our policy is to retain cash for operations and
expansion. Payment of cash dividends on the common stock is restricted by
Pegasus' publicly held debt securities and preferred stock. Our ability to
obtain cash from our subsidiaries with which to pay cash dividends is also
restricted by the subsidiaries' publicly held debt securities and bank
agreements.
Preferred Stock: We are allowed to pay dividends on our Series C
convertible preferred stock by issuing shares of our Class A common stock
instead of paying cash, and until July 1, 2002, we are allowed to pay dividends
on our Series A preferred stock by issuing more shares of that stock instead of
paying cash. We expect to issue shares of our Class A common stock and Series A
preferred stock to pay these dividends, and in any event our publicly held debt
securities do not permit us to pay cash dividends on our series A preferred
stock until July 1, 2002. We are also obligated to pay cash dividends of $1.4
million per year in the aggregate on our Series B, Series D and Series E junior
convertible participating preferred stock. These payments are subject to
compliance with outstanding indentures and the certificate of designation with
respect to the Series A preferred stock.
Golden Sky
Price Range of Common Stock
Golden Sky is a privately-held company and its securities are not listed
for quotation on the Nasdaq National Market or on a stock exchange.
Dividend Policy
Golden Sky has never declared or paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends in the foreseeable
future. Any declaration and payment of dividends would be subject to the
discretion of Golden Sky's board of directors. Any future determination to pay
dividends will depend on Golden Sky's results of operations, financial
condition, capital requirements, contractual restrictions and other factors
deemed relevant at the time by its board of directors.
26
<PAGE>
THE SPECIAL MEETING
Solicitation
The accompanying proxy is solicited on behalf of Pegasus' board of
directors. In addition to the use of the mails, proxies may be solicited by
Pegasus' directors, officers and employees, without additional compensation, by
personal interview, telephone, telegram, or otherwise. Arrangements also may be
made with brokerage houses and other custodians, nominees and for the
forwarding of solicitation material to the beneficial owners of stock held of
record by such persons, and Pegasus may reimburse them for their reasonable
out-of-pocket and clerical expenses.
Voting; Record Date and Revocability of Proxies
Only holders of common stock of record at the close of business on
February 25, 2000 will be entitled to vote at the special meeting. Each record
holder of Class A common stock will be entitled to one vote per share, and each
record holder of Class B common stock will be entitled to ten votes per share.
As of the record date, there were 15,895,968 shares of Class A common stock and
4,581,900 shares of Class B common stock issued and outstanding.
The proposals to be acted on at the special meeting require the following
votes to be approved:
<TABLE>
<S> <C>
Merger with Golden Sky and amendments to the Majority of voting power of the Class A and
restricted stock plan and stock option plan. Class B common stock present at the meeting
in person or by proxy voting together as a
single class.
Amendment to certificate of incorporation Majority of voting power of all outstanding
increasing Class A common stock and non-voting Class A and Class B common stock, voting
common stock. together as a single class.
Amendment to certificate of incorporation Majority of all outstanding shares of Class A
increasing Class B common stock. common stock and Class B common stock, voting
as separate classes.
Amendment to certificate of incorporation Majority of voting power of all outstanding
increasing preferred stock. Class A and Class B common stock voting
together as a single class, and majority of all
outstanding Series A preferred stock and
Series C convertible preferred stock, voting
together as a single class.
</TABLE>
If a proxy is marked as "withhold authority" or "abstain" on any matter,
or if specific instructions are given that no vote be cast on any specific
matter, the shares represented by such proxy will not be voted on such matter.
Abstentions will be included within the number of shares present at the special
meeting and entitled to vote for the purposes of determining whether such
matter has been authorized, but other types of non-votes, including non-votes
by broker nominees, will not be so included.
Shares may be voted at the special meeting in person or by proxy. All
valid proxies received prior to the special meeting will be voted. Unless
marked to the contrary, such proxies will be voted "for" all proposals. If any
other business is properly brought before the special meeting, the proxies will
be voted, to the extent permitted by the rules and regulations of the SEC, in
accordance with the judgment of the persons voting the proxies. A stockholder
who has given a proxy may revoke it at any time prior to such proxy being voted
at the special meeting by filing with Pegasus' Secretary an instrument revoking
that proxy or a duly executed proxy bearing a later date, or by attending the
special meeting in person and giving notice of such revocation. Attendance at
the special meeting does not by itself constitute revocation of a proxy.
As a result of his beneficial ownership of Class A common stock and all
outstanding shares of Pegasus' Class B common stock, Marshall W. Pagon,
Pegasus' President, Chief Executive Officer and Chairman of the Board, controls
74.5% of the voting power of Pegasus' common stock. Mr. Pagon therefore has
sufficient voting power to approve each of the proposals without the vote of
any other stockholders, except the
27
<PAGE>
proposals to amend Pegasus' certificate of incorporation to increase the
authorized number of shares of Class B common stock and preferred stock. Mr.
Pagon has advised Pegasus that he intends to cause the record holders of the
Class B common stock to vote in favor of all such proposals.
Quorum
Approval of each of the proposals to be voted upon at the special meeting
requires that a quorum be present. A majority of the total voting power of all
outstanding shares of Pegasus' common stock constitutes a quorum. The holders
of shares of common stock entitled to vote at the special meeting who attend
the special meeting in person or who validly complete a proxy will be counted
for purposes of determining whether a quorum is present, regardless of how
those stockholders vote with respect to any matter. Abstentions, but not other
types of non-votes, will be counted for purposes of determining whether a
quorum is present.
Purpose of the Special Meeting
At the special meeting, holders of Class A common stock and Class B common
stock, voting together as one class, will vote upon the proposed merger of
Golden Sky and Pegasus GSS Merger Sub pursuant to the merger agreement. See
Proposal 1: Approval of Merger. The merger agreement, as amended, has been
approved by Pegasus' board of directors by unanimous vote and is attached
hereto as Annex I. Under the terms of the merger agreement, and subject to the
satisfaction of the conditions set forth in the agreement:
o Golden Sky will merge with Pegasus GSS Merger Sub and become a
wholly-owned subsidiary of Pegasus;
o with certain exceptions and subject to certain adjustments, the holders
of Golden Sky's capital stock will have the right to receive shares of
Class A common stock, and holders of outstanding Golden Sky options and
warrants will have the right to receive options and warrants to purchase
shares of Pegasus' Class A common stock;
o Pegasus' board of directors will be increased to eleven members,
including two directors to be designated by certain stockholders of Golden
Sky; and
o certain stockholders of Golden Sky, Marshall W. Pagon, Pegasus'
President, Chief Executive Officer and Chairman of the Board, certain
other Pegasus shareholders and certain affiliates of Mr. Pagon that hold
all of the Class B common stock will amend and restate the voting
agreement, which provides for the designation and election of directors.
In addition, prior to the closing of the merger, certain holders of Golden
Sky's capital stock will have the right to sell shares to Pegasus for up to
$25.0 million in cash, which will reduce the number of shares of Pegasus Class
A Common Stock to be issued to the Golden Sky stockholders in the merger.
At the special meeting, in addition to voting on the approval and adoption
of the merger agreement, holders of the common stock will also vote upon the
following proposals:
o to amend the restricted stock plan to increase the number of shares of
Class A common stock that may be issued thereunder from 350,000 to 750,000
(see Proposal 2: Amendment to Restricted Stock Plan);
o to amend the stock option plan to increase the number of shares of Class
A common stock that may be issued thereunder from 1,300,000 to 3,000,000
and to increase the maximum number of shares of Class A common stock that
may be issued under options granted to any employee from 550,000 to
1,000,000 (see Proposal 3: Amendment to Stock Option Plan).
o to amend the certificate of incorporation to increase the authorized
number of shares of Class A common stock from 50,000,000 shares to
250,000,000 shares (see Proposal 4: Amendment to Certificate of
Incorporation to Increase the Number of Authorized Shares of Class A
Common Stock from 50,000,000 to 250,000,000 Shares);
o to amend the certificate of incorporation to increase the authorized
number of shares of Class B common stock from 15,000,000 shares to
30,000,000 shares (see Proposal 5: Amendment to Certificate of
Incorporation to Increase the Number of Authorized Shares of Class B
Common Stock from 15,000,000 to 30,000,000 Shares);
28
<PAGE>
o to amend the certificate of incorporation to increase the number of
authorized shares of non-voting common stock from 20,000,000 shares to
200,000,000 shares (see Proposal 6: Amendment to Certificate of
Incorporation to Increase the Number of Authorized Shares of Non-Voting
Common Stock from 20,000,000 to 200,000,000 shares); and
o to amend the certificate of incorporation to increase the number of
authorized shares of preferred stock from 5,000,000 shares to 20,000,000
shares (see Proposal 7: Amendment to Certificate of Incorporation to
Increase the Number of Authorized Shares of Preferred Stock from 5,000,000
to 20,000,000 Shares).
If any other business is brought before the special meeting, proxies will
be voted, to the extent permitted by the rules and regulations of the SEC, in
accordance with the judgment of the persons voting the proxies. We are unaware
at this time of any other matters which will come before the special meeting.
A form of proxy for use by the holders of the common stock at the special
meeting and a return envelope for each form of proxy are enclosed with this
proxy statement/prospectus. Stockholders may revoke the authority granted by
their execution of proxies at any time before the effective exercise thereof by
filing with the Secretary of Pegasus a written notice of revocation or a duly
executed proxy bearing a later date. They may also do so by voting in person at
the special meeting. A form of proxy is attached as Annex VII hereto. Unless
otherwise indicated on the form of proxy, shares represented by any proxy in
the appropriate enclosed form, if the proxy is properly executed and received
by Pegasus prior to the special meeting and not revoked, will be voted in favor
of all the matters to be presented to the special meeting, as described above.
PROPOSAL 1: APPROVAL OF MERGER
Background of the Merger
Following its October 1996 initial public offering, Pegasus has pursued
its acquisition strategy of acquiring DIRECTV service territories from other
independent providers of DIRECTV who are members or affiliate members of the
National Rural Telecommunications Cooperative. From 1997 through 1999, Pegasus
acquired direct broadcast satellite territories and related assets in rural
portions of 34 states from 84 independent providers of DIRECTV for total
consideration of approximately $736.7 million. After giving effect to pending
Pegasus direct broadcast satellite acquisitions, but not to the merger with
Golden Sky, Pegasus will have the exclusive right to provide DIRECTV services
to over 5.3 million U.S. television households in rural areas of 36 states
serving a subscriber base, as of December 31, 1999, of approximately 752,800
direct broadcast satellite customers. Pegasus believes that there is an
opportunity for additional growth through the acquisition of DIRECTV
territories held by the other approximately 100 National Rural
Telecommunications Cooperative members and affiliate members. We also believe
that, as the largest independent provider of DIRECTV services, we are well
positioned to achieve economies of scale through the acquisition of DIRECTV
territories held by other National Rural Telecommunications Cooperative members
and affiliate members.
Because Golden Sky is now the second largest independent provider of
DIRECTV services, we believe that a business combination with Golden Sky
represents a unique opportunity to further our growth objectives. Golden Sky
has the exclusive right to provide DIRECTV services within certain rural
territories in the U.S. encompassing approximately 1.9 million U.S. television
households in 24 states. As of December 31, 1999, Golden Sky had approximately
345,200 direct broadcast satellite customers.
Pegasus and Golden Sky had very preliminary communications about a
possible transaction in January and February of 1999. There were no further
communications between the companies until April 19, 1999, when Pegasus sent to
Golden Sky a proposal to acquire Golden Sky. After further conversations
between the parties, Golden Sky rejected Pegasus' proposal. At the April 23,
1999 meeting of the Pegasus board of directors, management of Pegasus briefed
the board of these developments and the board constituted a special acquisition
committee consisting of Mr. Pagon and Messrs. Harry Hopper and William Phoenix
to monitor negotiations with Golden Sky and make recommendations to the board
concerning any transaction. The board also authorized Pegasus to engage an
investment banking firm to be selected by management, subject to the
recommendations of the special acquisition committee, and management
subsequently selected CIBC World
29
<PAGE>
Markets Corp. with the approval of the special acquisition committee, with Mr.
Phoenix abstaining. The special acquisition committee convened on a periodic
basis as warranted by the status of communications between the companies, and
the Pegasus board of directors was briefed about the status of the discussions
at its regular meetings.
There were no further communications between Pegasus and Golden Sky until
June 30, 1999, when Mr. Pagon responded to confidential inquiries about the
structure of a possible acquisition transaction between Pegasus and Golden Sky.
On July 12, 1999, the board of directors of Golden Sky appointed a special
acquisition committee consisting of Mr. Collatos and Messrs. Erik Torgerson,
Robert Benbow and Rodney Weary. On July 13, 1999, Golden Sky, through an
intermediary, responded to Mr. Pagon's suggestions for a transaction structure
by proposing requirements for the essential terms of a transaction. On July 29,
1999, representatives of Pegasus and Golden Sky met to discuss a possible
transaction. Communications between the companies did not resume again until
the end of September 1999, when Mr. Pagon and Mr. Collatos began a series of
periodic telephone calls and meetings to discuss a possible transaction. The
calls and meetings occurred during September, October and November 1999.
Representatives of Pegasus and Golden Sky met to formally negotiate a
transaction on December 7, 1999, December 20 and 21, 1999 and January 4, 2000.
On January 6, 2000 Golden Sky's board of directors met with members of
Golden Sky's senior management and legal advisors to review the terms of the
merger agreement that resulted from the negotiations. At the January 6, 2000
meeting, Golden Sky's board of directors unanimously approved the merger
agreement and authorized the execution of the merger agreement on such terms
with such changes as the executive officers approved.
On January 9, 2000, Pegasus' board of directors met with members of
Pegasus' senior management and legal and financial advisors to review the terms
of the merger agreement that resulted from these negotiations. At this meeting,
CIBC World Markets reviewed with Pegasus' board of directors its financial
analysis of the exchange ratio in the proposed merger and delivered to Pegasus'
board of directors its oral opinion, which was confirmed by its written opinion
dated January 10, 2000, the date of execution of the merger agreement, to the
effect that, as of the date of the opinion and based on and subject to the
matters described in the opinion, the exchange ratio in the merger was fair,
from a financial point of view, to Pegasus. This opinion relates only to the
overall exchange ratio in the merger, and not to the separate conversion ratios
that apply to each of Golden Sky's separate classes of stock. Pegasus
understands that those separate ratios were determined by discussions among
Golden Sky's stockholders to which Pegasus was not a party. See The Merger --
The Merger Agreement -- Conversion Ratios.
At the January 9, 2000 meeting, Pegasus' board of directors unanimously
approved the merger agreement and authorized the execution of the merger
agreement on such terms with such changes as the executive officers approved.
On January 10, 2000, Pegasus, GSS Merger Sub, holders of Pegasus' Class B
common stock, Golden Sky and certain of Golden Sky's stockholders entered into
the merger agreement. On January 11, 2000, Pegasus and Golden Sky publicly
announced the merger. On January 25, 2000, the parties amended the merger
agreement to provide for the allocation of the total merger consideration among
the Golden Sky stockholders. This allocation did not affect the total merger
consideration.
Reasons for the Merger and Recommendations of Pegasus' Board of Directors
At the meeting held on January 9, 2000, Pegasus' board of directors, by
unanimous vote, determined that the terms of the merger agreement and the
merger are in the best interests of Pegasus and approved the merger agreement
and the merger. At this meeting, Pegasus' board of directors also recommended
that Pegasus' stockholders approve the merger proposal. In reaching these
conclusions and recommendations, Pegasus' board of directors believed that the
following factors strongly weighed in favor of the merger:
o Golden Sky's territories complement Pegasus' existing territorial
footprint, both in terms of territories adjacent to existing Pegasus
territories and new states and regions.
30
<PAGE>
o The merger is expected to result in economies of scale, including cost
savings from consolidation of duplicative personnel and other
infrastructure, and the ability to improve operating performance by
spreading fixed costs over a larger base of subscribers.
o Other synergies could potentially result from the merger, such as the
trained field management of Golden Sky.
o The merger could provide Pegasus with other, less tangible benefits of
scale, including a greater degree of national prominence.
Pegasus' board of directors also concluded that the consideration to be paid in
the merger was appropriate, particularly in light of the financial analysis
presented by CIBC World Markets, which is described in the next section.
Pegasus' board of directors believes that the only potentially negative
factor in the merger is Golden Sky's indebtedness and high degree of leverage,
and related issues concerning integration of the two companies' operations
within the constraints of their respective debt and preferred stock covenants.
See Risk Factors -- Risk Factors Relating to Golden Sky's Business -- Golden
Sky May Not Be Able To Make Principal or Interest Payments on Its Substantial
Debt, Risk Factors -- Risk Factors Associated With the Merger -- We May Not Be
Able To Integrate Golden Sky's Operations Successfully and The Merger --
Consequences under Debt Agreements and Preferred Stock Terms. Pegasus' board of
directors concluded that the potential benefits of the merger outweigh these
possible detriments.
The proposal requires the affirmative vote of holders of shares
representing a majority of the voting power of the outstanding shares of
Pegasus' Class A and Class B common stock present, in person or by proxy, at
the meeting. The Class A and Class B common stock will vote together as a
single class.
Pegasus' Board of Directors unanimously recommmends that stockholders vote
for the merger proposal.
Opinion of CIBC World Markets Corp.
Pegasus engaged CIBC World Markets to render an opinion as to the
fairness, from a financial point of view, to Pegasus of the exchange ratio in
the merger. Pegasus selected CIBC World Markets based on CIBC World Markets'
reputation, expertise and familiarity with Pegasus and its business. CIBC World
Markets is an internationally recognized investment banking firm and, as a
customary part of its investment banking business, is regularly engaged in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities, private
placements and valuations for other purposes. CIBC World Markets has in the
past provided and is currently providing services to Pegasus unrelated to the
proposed merger, for which services CIBC World Markets has received and will
receive compensation. William P. Phoenix, a Managing Director of CIBC World
Markets, is a director of Pegasus and, in that capacity, holds options to
purchase shares of Pegasus' Class A common stock. In the ordinary course of
business, CIBC World Markets and its affiliates may actively trade the
securities of Pegasus for their own account and for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities.
On January 9, 2000, at a meeting of Pegasus' board of directors held to
evaluate the proposed merger, CIBC World Markets rendered an oral opinion,
which opinion was confirmed by delivery of a written opinion dated January 10,
2000, the date of the merger agreement. CIBC World Market's opinion was to the
effect that, as of the date of the opinion and based on and subject to the
matters described in its opinion, the exchange ratio provided for in the merger
was fair to Pegasus from a financial point of view.
The full text of CIBC World Markets' written opinion dated January 10,
2000, which describes the assumptions made, matters considered and limitations
on the review undertaken, is attached as Annex VI and is incorporated into this
proxy statement/prospectus by reference. CIBC World Markets' opinion is
directed to Pegasus' board of directors, addresses only the fairness of the
exchange ratio from a financial point of view to Pegasus and does not
constitute a recommendation to any stockholder as to any matters
31
<PAGE>
relating to the proposed merger. This opinion also does not address the
allocation of the Pegasus stock to be issued in the merger among the various
Golden Sky stockholders. The summary of CIBC World Markets' opinion described
below is qualified in its entirety by reference to the full text of its
opinion.
In arriving at its opinion, CIBC World Markets:
o reviewed the merger agreement and related documents;
o reviewed audited financial statements of Pegasus and Golden Sky for the
fiscal years ended December 31, 1997 and December 31, 1998;
o reviewed unaudited financial statements of Pegasus and Golden Sky for the
nine months ended September 30, 1999;
o reviewed financial projections prepared by the managements of Pegasus
and Golden Sky;
o reviewed the historical market prices and trading volume for Pegasus
Class A common stock;
o held discussions with the senior managements of Pegasus and Golden Sky
with respect to the business and prospects for future growth of Pegasus
and Golden Sky;
o reviewed and analyzed publicly available financial data for companies
that CIBC World Markets deemed comparable to Pegasus and Golden Sky;
o reviewed and analyzed publicly available information for transactions
that CIBC World Markets deemed comparable to the merger;
o performed discounted cash flow analyses of Pegasus and Golden Sky using
assumptions of future performance provided to CIBC World Markets by the
managements of Pegasus and Golden Sky;
o reviewed public information concerning Pegasus and affiliates of Golden
Sky; and
o performed other analyses and reviewed other information as it deemed
appropriate.
In rendering its opinion, CIBC World Markets relied on and assumed,
without independent verification or investigation, the accuracy and
completeness of all of the financial and other information that Pegasus, Golden
Sky and each of their employees, representatives and affiliates provided to or
discussed with CIBC World Markets.
With respect to forecasts of future financial condition and operating
results of Pegasus and Golden Sky and the potential synergies and strategic
benefits anticipated to result from the merger, including the amount, timing
and achievability of those potential synergies and strategic benefits, CIBC
World Markets assumed, at the direction of the managements of Pegasus and
Golden Sky, without independent verification or investigation, that the
forecasts were reasonably prepared on bases reflecting the best available
information, estimates and judgments of the managements of Pegasus and Golden
Sky.
CIBC World Markets also assumed, with Pegasus' consent, that the merger
would be treated as a tax-free reorganization for federal income tax purposes
and, to the extent material to its analysis, that the merger would be
consummated on the terms described in the merger agreement, without any waiver
or modification of the material terms or conditions of the merger. CIBC World
Markets further assumed, with Pegasus' consent, without independent
verification or investigation, that the outcome of the existing litigation and
related proceedings between the National Rural Telecommunications Cooperative
and DIRECTV would not have a material adverse effect on the financial condition
or results of operations of Pegasus or Golden Sky.
CIBC World Markets did not make or obtain any independent evaluations or
appraisals of the assets or liabilities of Pegasus, Golden Sky or affiliated
entities. CIBC World Markets expressed no opinion as to the underlying
valuation, future performance or long-term viability of Pegasus or Golden Sky,
or the price at which Pegasus' Class A common stock would trade after
announcement or consummation of the merger. CIBC World Markets was not
requested to, and it did not, participate in the negotiation or structuring of
the merger. CIBC World Markets' opinion was necessarily based on the
information available to CIBC World Markets and
32
<PAGE>
general economic, financial and stock market conditions and circumstances as
they existed and could be evaluated by CIBC World Markets as of the date of the
opinion. Although subsequent developments may affect the opinion of CIBC World
Markets, it does not have any obligation to update, revise or reaffirm its
opinion. No other instructions or limitations were imposed by Pegasus' board of
directors on CIBC World Markets with respect to the investigations made or the
procedures followed by it in rendering its opinion.
The following is a summary of the material financial analyses underlying
CIBC World Markets' opinion to Pegasus' board of directors in connection with
the merger. The financial analyses summarized below include information
presented in tabular format. In order to fully understand CIBC World Markets'
financial analyses, the tables must be read together with the text of each
summary. The tables alone do not constitute a complete description of the
financial analyses. You should consider the data set forth in the tables below
together with the full narrative description of the financial analyses,
including the methodologies and assumptions underlying the analyses. If you
fail to consider both the tabular data and the narrative description together,
you could have a misleading or incomplete view of CIBC World Markets' financial
analyses.
Selected Companies Analyses. CIBC World Markets compared financial and
stock market information for Pegasus and Golden Sky and the following 19
selected publicly held companies in the direct broadcast satellite, broadcast
and cable industries:
<TABLE>
<CAPTION>
Direct Broadcast
Satellite Companies Broadcast Companies Cable Companies
- ---------------------------- ---------------------------------- -----------------------------------
<S> <C> <C>
o EchoStar Communications o ACME Communication, Inc. o Adelphia Communications Corp.
Corp. o BHC Communications, Inc. o Cablevision Systems Corp.
o Hughes Electronics Corp. o Chris-Craft Industries, Inc. o Charter Communications, Inc.
o Granite Broadcasting Corp. o Comcast Corp.
o Hearst-Argyle Television, Inc. o Cox Communications, Inc.
o Paxson Communications Corp. o Insight Communications Co., Inc.
o Sinclair Broadcast Group, Inc. o MediaOne Group, Inc.
o United Television, Inc.
o Univision Communications Inc.
o Young Broadcasting Inc.
</TABLE>
CIBC World Markets reviewed, among other things, enterprise values,
calculated as equity market value, plus debt, less cash, as multiples of
estimated calendar years 1999, 2000 and 2001 revenues and subscribers and
estimated calendar years 1999 and 2000 earnings before interest, taxes,
depreciation and amortization, commonly referred to as EBITDA. All multiples
were based on closing stock prices on January 6, 2000. Estimated financial data
for the selected companies were based on publicly available research analysts'
estimates and estimated financial data for Pegasus and Golden Sky were based on
internal estimates of the managements of Pegasus and Golden Sky.
CIBC World Markets applied a range of selected multiples of estimated
calendar years 1999, 2000 and 2001 revenues and subscribers derived from the
selected companies to corresponding financial data of Golden Sky. In reviewing
Golden Sky, the selected companies and related multiples, CIBC World Markets
noted the lawsuit between the National Rural Telecommunications Cooperative and
DIRECTV and Golden Sky's lack of rights to interactive services, limited
local-to-local benefit, current lack of access to premium programming and lack
of critical mass as compared to other sector companies. This analysis indicated
the following implied equity reference range for Golden Sky, as compared to the
equity value for Golden Sky implied by the exchange ratio in the merger based
on the closing price of Pegasus' Class A common stock on January 6, 2000:
Implied Equity Reference Equity Value for Golden Sky
Range for Golden Sky Implied by Exchange Ratio
- ------------------------------------ ----------------------------
$550.0 million -- $900.0 million $572.8 million
33
<PAGE>
CIBC World Markets also applied a range of selected multiples of estimated
calendar years 1999, 2000 and 2001 revenues and subscribers derived from the
selected digital broadcast companies to corresponding financial data of
Pegasus' direct broadcast satellite business, a range of selected multiples of
estimated calendar years 1999 and 2000 revenues and EBITDA derived from the
selected broadcast companies to corresponding financial data of Pegasus'
broadcast business and a range of selected multiples of estimated calendar year
1999 subscribers and estimated calendar years 1999, 2000 and 2001 revenues and
EBITDA derived from the selected cable companies to corresponding financial
data of Pegasus' cable business. In reviewing Pegasus, the selected companies
and related multiples, CIBC World Markets noted the lawsuit between the
National Rural Telecommunications Cooperative and DIRECTV and Pegasus' lack of
rights to interactive services, limited local-to-local benefit and current lack
of access to premium programming as compared to other sector companies. After
adjustment for after-tax corporate expenses, this analysis indicated the
following aggregate implied equity reference range for Pegasus, as compared to
the closing price of Pegasus' Class A common stock on January 6, 2000:
Implied Aggregate Equity Closing Price of Pegasus' Class A
Reference Range for Pegasus Common Stock on January 6, 2000
- ------------------------------- ----------------------------------
$95.00 -- $149.00 per share $88.13 per share
Discounted Cash Flow Analyses. CIBC World Markets performed separate
discounted cash flow analyses to estimate the present value of the unlevered,
after-tax free cash flows that Pegasus and Golden Sky could generate for fiscal
years 2000 through 2004, based on internal estimates of the managements of
Pegasus and Golden Sky, both before and after taking into account potential
synergies expected by the managements of Pegasus and Golden Sky to result from
the merger. CIBC World Markets calculated the range of estimated terminal
values for Golden Sky by applying:
o terminal value multiples ranging from 11.0x to 13.0x to Golden Sky's
projected fiscal year 2004 EBITDA,
o terminal value multiples ranging from 4.0x to 6.0x to Golden Sky's
projected fiscal year 2004 revenues,
o terminal values ranging from $3,300 to $3,500 per subscriber to Golden
Sky's projected fiscal year 2004 subscribers, and
o terminal growth rates of 6.0% to 9.0% to Golden Sky's projected fiscal
year 2004 revenues.
The present value of the cash flows and terminal values were calculated
using discount rates ranging from 12.0% to 16.0%. This analysis indicated the
following implied equity reference ranges for Golden Sky, as compared to the
equity value for Golden Sky implied by the exchange ratio in the merger based
on the closing price of Pegasus' Class A common stock on January 6, 2000:
<TABLE>
<CAPTION>
Implied Equity Reference Range for Golden Sky
- ------------------------------------------------------------------------- Equity Value for Golden Sky
Without Synergies With Synergies Implied by Exchange Ratio
- --------------------------------------- -------------------------------- ----------------------------
<S> <C> <C>
$300.0 million -- $600.0 million $700.0 million -- $1.2 billion $572.8 million
</TABLE>
CIBC World Markets calculated the range of estimated terminal values for
Pegasus by applying:
o terminal value multiples ranging from 11.0x to 13.0x to Pegasus'
projected fiscal year 2004 EBITDA for its direct broadcast satellite
business,
o terminal value multiples ranging from 4.0x to 6.0x to Pegasus' projected
fiscal year 2004 revenues for its direct broadcast satellite business,
o terminal values ranging from $3,300 to $3,500 per subscriber to Pegasus'
projected fiscal year 2004 subscribers for its direct broadcast satellite
business,
o terminal growth rates of 7.0% to 9.0% to Pegasus' projected fiscal year
2004 revenues for its direct broadcast satellite business, and
34
<PAGE>
o terminal value multiples ranging from 12.0x to 14.0x to Pegasus'
projected 2004 EBITDA for its cable and broadcast businesses.
The present value of the cash flows and terminal values were calculated
using discount rates ranging from 12.0% to 16.0% for Pegasus' direct broadcast
business, 11.0% to 13.0% for its cable business and 10.0% to 12.0% for its
broadcast business. After adjustment for after-tax corporate expenses, this
analysis indicated the following implied aggregate equity reference range for
Pegasus, as compared to the closing price of Pegasus' Class A common stock per
share on January 6, 2000:
<TABLE>
<CAPTION>
Implied Aggregate Equity Closing Price of Pegasus' Class A
Reference Range for Pegasus Common Stock on January 6, 2000
- ----------------------------------------- ----------------------------------
<S> <C>
$82.00 -- $135.00 per share $88.13 per share
</TABLE>
Exchange Ratio Analysis. CIBC World Markets calculated the aggregate
exchange ratio reference ranges implied by the results derived from the
Selected Companies Analyses and Discounted Cash Flow Analyses described above
and compared these ranges to the implied exchange ratio in the merger. This
analysis indicated the following implied approximate exchange ratio reference
ranges, as compared to the exchange ratio in the merger:
<TABLE>
<CAPTION>
Selected Discounted Cash
Companies Analysis Flow Analysis Proposed Merger
-------------------- ------------------- ----------------
<S> <C> <C> <C>
Implied Exchange Ratio Range 41.95x -- 96.32x 20.00x -- 69.51x 69.57x
Implied Exchange Ratio Range (With Synergies) N/A 60.74x -- 146.34x N/A
</TABLE>
Precedent Transactions Analysis. CIBC World Markets reviewed the purchase
prices and implied transaction multiples in the following 35 selected
transactions in the direct broadcast satellite and cable industries, which are
presented in reverse chronological order:
<TABLE>
<CAPTION>
Acquiror Target
- -------------------------------------- ---------------------------------------------------------------
<S> <C>
Direct Broadcast Satellite Companies:
o Hughes Electronics Corp. (DIRECTV) Primestar, Inc. (direct broadcast satellite business and Tempo
Satellite, Inc.)
o Hughes Electronics Corp. (DIRECTV) US Satellite Broadcasting Co., Inc.
o EchoStar Communications Corp. News Corp./MCI Worldcom, Inc. (satellite television assets)
o Pegasus Communications Corporation Digital Television Services, Inc.
Cable Companies:
o Comcast Corp. Comcast MHCP Holdings, L.L.C.
o Comcast Corp. Jones Intercable, Inc. (resulting in 100% ownership)
o Adelphia Communications Corp. Cablevision Systems Corp. (Ohio units)
o Comcast Corp. Lenfest Communications, Inc.
o Comcast Corp. Jones Intercable, Inc. (resulting in 79% ownership)
o Cox Communications, Inc. Gannett Co., Inc. (cable operations)
o Cox Communications, Inc. AT&T Corp. (selected cable systems)
o Charter Communications, Inc. Bresnan Communications Co.
o Charter Communications, Inc. Falcon Communications, L.P.
o Charter Communications, Inc. Fanch Cablevision L.P. (cable systems)
o Charter Communications, Inc. Avalon Cable LLC
o Cox Communications, Inc. TCA Cable TV, Inc.
o Mediacom LLC Triax Midwest Associates, L.P.
o Adelphia Communications Corp. Harron Communications Corp.
o Cox Communications, Inc. Media General, Inc. (cable systems)
o Adelphia Communications Corp. Century Communications Corp.
o Adelphia Communications Corp. FrontierVision Partners, L.P.
o Charter Communications, Inc. Rifkin Acquisition Partners, L.L.P.
o Charter Communications, Inc. Intermedia Capital Partners IV, L.P. (cable systems)
o Charter Communications, Inc. Helicon Partners I, L.P.
o Charter Communications, Inc. Greater Media Cablevision, Inc. (cable systems)
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
Acquiror Target
- ------------------------------------ -------------------------------------------------------
<S> <C>
o Charter Communications, Inc. Renaissance Media Group LLC
o Charter Communications, Inc. American Cable Entertainment, LLC
o Adelphia Communications Corp. Verto Communications, Inc.
o Insight Communications Co., Inc. Coaxial Communications of Central Ohio (cable systems)
o Marcus Cable Company L.L.C Charter Communications, Inc.
o AT&T Corp. Tele-Communications, Inc.
o Avalon Cable LLC Cable Michigan, Inc.
o Comcast Corp. Jones Intercable, Inc. (resulting in 37% ownership)
o Cox Communications, Inc. Prime South Diversified, Inc.
o Charter Communications, Inc. Affiliated Investors
</TABLE>
CIBC World Markets reviewed, among other things, enterprise values in the
selected transactions as multiples of estimated calendar year 1999 subscribers
and estimated calendar years 1999, 2000 and 2001 revenues. All multiples were
based on publicly available information at the time of announcement of the
relevant transaction. CIBC World Markets then applied a range of selected
multiples of estimated calendar year 1999 subscribers and estimated calendar
years 1999, 2000 and 2001 revenues derived from the selected transactions to
corresponding financial statistics of Golden Sky. This analysis indicated the
following implied equity reference range for Golden Sky, as compared to the
equity value for Golden Sky implied by the exchange ratio in the merger based
on the closing price of Pegasus' Class A common stock on January 6, 2000:
Implied Equity Reference Equity Value for Golden Sky
Range for Golden Sky Implied by Exchange Ratio
- ------------------------------------ ----------------------------
$350.0 million -- $600.0 million $572.8 million
Pro Forma Merger Analysis. CIBC World Markets analyzed the potential pro
forma effect of the merger, for estimated calendar years 2000, 2001 and 2002,
on:
o Pegasus' EBITDA, excluding subscriber acquisition costs, per subscriber,
and
o cash earnings per share.
CIBC World Markets performed this analysis based on internal estimates of the
managements of Pegasus and Golden Sky after taking into account the potential
synergies expected by the managements of Pegasus and Golden Sky to result from
the merger. This analysis indicated that the merger could be dilutive to, or
result in a decrease in, Pegasus' EBITDA, excluding subscriber acquisition
costs, per subscriber in estimated calendar years 2000 and 2001 and neutral to
Pegasus' EBITDA, excluding subscriber acquisition costs, per subscriber in
estimated calendar year 2002. This analysis also indicated that the merger
could be dilutive to Pegasus' cash earnings per share in estimated calendar
year 2000 and accretive to, or result in an increase in, Pegasus' cash earnings
per share in estimated calendar years 2001 and 2002. The actual results
achieved by the combined company may vary from projected results and the
variations may be material.
Contribution Analysis. CIBC World Markets analyzed the respective
contributions of Pegasus and Golden Sky to various operational metrics of the
combined entity, based on internal estimates of the managements of Pegasus and
Golden Sky. In particular, CIBC World Markets reviewed the contributions of
Pegasus and Golden Sky to the combined company's estimated calendar years 2000,
2001 and 2002 revenues, EBITDA excluding subscriber acquisition costs, and
average subscribers, both before and after taking into account potential
synergies expected by the managements of Pegasus and Golden Sky to result from
the merger. This analysis indicated the following implied percentage
contributions for Pegasus and Golden Sky, as compared to the pro forma equity
ownership of the stockholders of Pegasus and Golden Sky immediately upon the
closing of the merger:
36
<PAGE>
<TABLE>
<CAPTION>
Pegasus Golden Sky
Percentage Contribution Percentage Contribution Synergies
------------------------- ------------------------- ----------
<S> <C> <C> <C>
Revenues:
2000 ....................... 73.5% 24.8% 1.7%
2001 ....................... 75.0% 22.3% 2.7%
2002 ....................... 74.0% 21.2% 4.8%
EBITDA (excluding subscriber
acquisition costs):
2000 ....................... 76.7% 17.1% 6.2%
2001 ....................... 76.0% 16.3% 7.7%
2002 ....................... 77.3% 16.3% 6.4%
Average Subscribers:
2000 ....................... 68.9% 29.0% 2.1%
2001 ....................... 71.2% 25.9% 2.9%
2002 ....................... 71.8% 25.1% 3.1%
</TABLE>
Pro Forma Equity Ownership
in
Combined Company
- --------------------------
Pegasus Golden Sky
- ------------ -----------
77.4% 22.6%
Other Factors. In rendering its opinion, CIBC World Markets also reviewed
and considered other factors, including:
o selected research analysts' reports for Pegasus, including stock price
estimates of those analysts;
o historical market prices and trading volumes for Pegasus' Class A common
stock; and
o the relationship between movements in Pegasus' Class A common stock,
movements in the common stock of the selected direct broadcast satellite
companies and movements in the Nasdaq market.
The above summary is not a complete description of CIBC World Markets'
opinion to Pegasus' board of directors or the financial analyses performed and
factors considered by CIBC World Markets in connection with its opinion. The
preparation of a fairness opinion is a complex analytical process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances and, therefore, a fairness opinion is not readily susceptible to
summary description. CIBC World Markets believes that its analyses and the
summary above must be considered as a whole and that selecting portions of its
analyses and factors, without considering all analyses and factors, could
create a misleading or incomplete view of the processes underlying CIBC World
Markets' analyses and opinion.
In performing its analyses, CIBC World Markets considered industry
performance, general business, economic, market and financial conditions and
other matters existing as of the date of its opinion, many of which are beyond
the control of Pegasus and Golden Sky. No company, transaction or business used
in the analyses as a comparison is identical to Pegasus, Golden Sky or the
merger, and an evaluation of the results of those analyses is not entirely
mathematical. Rather, the analyses involve complex considerations and judgments
concerning financial and operating characteristics and other factors that could
affect the acquisition, public trading or other values of the companies,
business segments or transactions analyzed.
The estimates contained in CIBC World Markets' analyses and the ranges of
valuations resulting from any particular analysis are not necessarily
indicative of actual values or future results, which may be significantly more
or less favorable than those suggested by its analyses. In addition, analyses
relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, CIBC World Markets' analyses and estimates are
inherently subject to substantial uncertainty.
The type and amount of the consideration payable in the merger was
determined through negotiation between Pegasus and Golden Sky and the decision
to enter into the merger was solely that of Pegasus' board
37
<PAGE>
of directors. CIBC World Markets' opinion and financial analyses were only one
of many factors considered by Pegasus' board of directors in its evaluation of
the merger and should not be viewed as determinative of the views of Pegasus'
board of directors or management with respect to the merger or the exchange
ratio provided for in the merger.
Under the terms of its engagement, Pegasus agreed to pay CIBC World
Markets upon delivery of its opinion an aggregate fee of $750,000. In addition,
Pegasus agreed to reimburse CIBC World Markets for its reasonable out-of-pocket
expenses, including reasonable fees and expenses of its legal counsel. Pegasus
also agreed to indemnify CIBC World Markets and related parties against
liabilities, including liabilities under the federal securities laws, relating
to, or arising out of, its engagement.
Interests of Certain Persons in the Merger
At the time of the closing of the sale of Golden Sky capital stock to
Pegasus for cash, if any, Marshall W. Pagon will become entitled to a seat on
Golden Sky's board of directors. When the merger becomes effective, Mr. Pagon
and the holders of the Class B common stock, certain stockholders of Golden
Sky, and certain former stockholders of Digital Television Services, Inc. will
amend and restate the voting agreement that was entered into when Pegasus
acquired Digital Television Services in 1998. According to the terms of the
voting agreement, the parties to the voting agreement will each have the right
to designate one or more directors to Pegasus' board of directors. A copy of
the voting agreement to be entered into is attached as Annex II to this proxy
statement/prospectus. See The Merger -- Voting Agreement.
When the merger becomes effective, a registration rights agreement will
also be entered into by, among others, Pegasus, certain of Golden Sky's
stockholders, and members of Golden Sky's senior management who elect to do so.
The registration rights agreement will provide certain underwritten demand,
shelf and piggyback registration rights to holders of Class A common stock
received in the merger who are parties to the agreement. See The Merger --
Registration Rights Agreement.
Ownership of Pegasus After the Merger
Upon completion of the merger, there will be outstanding 21,980,968 shares
of Pegasus' Class A common stock, assuming no additional shares are issued
before the effective time and excluding shares issued to Golden Sky option and
warrant holders, of which approximately 6,085,000, or 27.7%, will be owned by
the Golden Sky stockholders, and 4,581,900 shares of Class B common stock, all
of which will be beneficially owned by Mr. Pagon. Giving effect to the voting
rights of the Class B common stock, the Golden Sky stockholders and Mr. Pagon
will have voting power with respect to approximately 9.0% and 67.7%,
respectively, of the common stock.
Management of Pegasus After the Merger
It is not expected that there will be any change in the executive officers
of Pegasus as a result of the merger. For information concerning the
composition of Pegasus' board of directors following the merger, see The Merger
- -- Voting Agreement.
38
<PAGE>
PROPOSAL 2: AMENDMENT TO RESTRICTED STOCK PLAN
Our restricted stock plan provides for the issuance of up to 350,000
shares of Class A common stock pursuant to restricted stock awards. Awards for
an aggregate of approximately 183,626 shares of Class A common stock have been
granted as of February 17, 2000 under the plan.
We adopted the restricted stock plan to further our growth and success by
providing an incentive to eligible employees which increases their direct
involvement in our future success and which generally rewards these employees
in proportion to increases in location cash flows. Location cash flow means
pre-marketing cash flow less direct broadcast satellite subscriber acquisition
costs. Pre-marketing cash flow is calculated by taking on earnings and adding
back the following expenses:
o interest;
o income taxes;
o depreciation and amortization;
o non-cash charges, such as incentive compensation under restricted stock
plan and 401(k) plans;
o corporate overhead; and
o direct broadcast satellite subscriber acquisition costs, which are sales
and marketing expenses incurred to acquire new direct broadcast satellite
subscribers.
Pegasus' board of directors is proposing that the restricted stock plan be
amended to provide for an increase in the maximum number of shares of Class A
common stock which may be issued under the Plan from 350,000 to 750,000. In
proposing this amendment, Pegasus' board of directors took into consideration
the number of awards made under the plan and the substantially larger employee
base that will result upon consummation of the merger. The text of the proposed
amendment is attached as Annex III to this proxy statement/prospectus.
The amendment requires the affirmative vote of holders of shares
representing a majority of the voting power of the outstanding shares of
Pegasus' Class A and Class B common stock present, in person or by proxy, at
the meeting. The Class A and Class B common stock will vote together as a
single class.
Pegasus' board of directors unaminously recommends voting "for" proposal
2.
Restricted Stock Plan
The restricted stock plan provides for four types of restricted stock
awards that are made in the form of Class A common stock:
o profit sharing awards to general managers, department managers and
corporate managers, other than executive officers;
o special recognition awards for consistency (team award), initiative (a
team or individual award), problem solving (a team or individual award)
and individual excellence;
o excess awards that are made to the extent that an employee does not
receive a matching contribution under our U.S. 401(k) Plan or Puerto Rico
401(k) Plan because of restrictions of the Internal Revenue Code of 1986,
as amended, or the Puerto Rico Internal Revenue Code, respectively; and
o discretionary restricted stock awards.
An employee may elect to receive all or any portion of a profit sharing
award or discretionary award in the form of an option in lieu of restricted
stock. The number of shares of Class A common stock subject to such an option
is based on the number of shares that would have been payable in the form of
restricted stock. An executive officer may elect to receive a discretionary
award in the form of restricted stock, an option, cash or any combination of
the foregoing. However, the cash component of a discretionary award may not
exceed 33 1/3% of the executive officer's base salary for the year in which the
award is made, and is paid as soon as practicable after the award is made.
39
<PAGE>
Awards under the restricted stock plan, other than excess and
discretionary awards, are in proportion to annual increases in location cash
flow. For this purpose location cash flow is automatically adjusted for
acquisitions such that, for the purpose of calculating the annual increase in
location cash flow, the location cash flow of the acquired properties is
included as if it had been a part of our financial results for the comparable
period of the prior year.
We believe that the restricted stock plan results in greater increases in
stockholder value than results from a conventional stock option program because
it creates a clear cause and effect relationship between initiatives taken to
increase location cash flow and the amount of incentive compensation that
results therefrom.
Although the restricted stock plan, like conventional stock option
programs, provides compensation to employees as a function of growth in
stockholder value, the tax and accounting treatments of this program are
different. For tax purposes, incentive compensation awarded under the
restricted stock plan, upon vesting, is fully tax deductible as compared to
conventional stock option grants, which generally are only partially tax
deductible upon exercise. For accounting purposes, conventional stock option
programs generally do not result in a charge to earnings while compensation
under the restricted stock plan does result in a charge to earnings. We believe
that these differences result in a lack of comparability between the operating
cash flow of companies that utilize conventional stock option programs and our
operating cash flow.
The table below lists the specific maximum components of the restricted
stock plan, other than excess and discretionary awards, in terms of a $1
increase in annual location cash flow.
Component Amount
Restricted stock grants to general managers based
on the increase in annual location cash flow
of individual business units ................... 6 Cents
Restricted stock grants to department managers
based on the increase in annual location
cash flow of individual business units ......... 6
Restricted stock grants to corporate managers
(other than executive officers) based on
the company-wide increase in annual location
cash flow ...................................... 3
Restricted stock grants to employees selected
for special recognition ........................ 5
---------
Total ........................................... 20 Cents
=========
As of December 31, 1999, we had 8 general managers, 48 department managers
and 12 corporate managers. As of December 31, 1999, we had approximately 1,006
full time and 347 part time employees eligible to receive awards under the
restricted stock plan.
Executive officers and non-employee directors are not eligible to receive
profit sharing awards under the restricted stock plan. Executive officers are
eligible to receive awards under the restricted stock plan consisting of:
o special recognition awards;
o excess awards made to the extent that an employee does not receive a
matching contribution under either of our 401(k) plans because of
restrictions of the Internal Revenue Code; and
o discretionary awards determined by a committee of not fewer than two
non-employee directors of Pegasus or Pegasus' entire board of directors.
Administration. The restricted stock plan is administered by committees
that are authorized by our board of directors. With respect to awards made to
executive officers, the restricted stock plan is administered by a committee of
not fewer than two directors of Pegasus. With respect to awards made to
employees who are not executive officers, the restricted stock plan is
administered by a management committee.
40
<PAGE>
Class A Common Stock Available. Under the restricted stock plan, 350,000
shares of Class A common stock (increased to 750,000 upon approval of proposal
2) are available for the granting of awards, including options granted in lieu
of restricted stock. This limit is subject to adjustment for certain changes in
Pegasus' structure or capitalization, such as stock splits, combinations, etc.
As of February 24, 2000, the closing sale price of the Class A common stock on
the Nasdaq National Market was $118 5/8.
Vesting. Special recognition awards are fully vested on the date of the
grant. All other awards of restricted stock vest on the following schedule:
o 34% after two years of service with Pegasus, including years before the
restricted stock plan was established;
o 67% after three years of service; and
o 100% after four years of service.
However, the Committee has the authorization to accelerate the vesting of any
award when granted and at any time thereafter. A grantee also becomes fully
vested in his outstanding restricted stock award(s) upon death or disability.
If a grantee's employment is terminated for a reason other than death or
disability before completing four years of service, his unvested restricted
stock awards will be forfeited. Restricted stock is held by Pegasus prior to
becoming vested. The grantee will, however, be entitled to vote the restricted
stock and receive any dividends of record prior to vesting.
Terms and Conditions of Options Granted in Lieu of Restricted Stock. Any
option granted in lieu of restricted stock generally will be an incentive stock
option. The number of shares covered by an option granted in lieu of restricted
stock will be determined by multiplying the number of shares which would have
been subject to the restricted stock award -- had no election to receive other
than stock been made -- by the percentage of the award to be paid in the form
of an option and a conversion factor determined under a valuation formula
established by the committee, or its delegate. However, no employee may be
granted options under the restricted stock plan covering more than 50,000
shares of Class A common stock in any calendar year, subject to adjustment for
certain changes in Pegasus' structure or capitalization.
All options granted under the restricted stock plan have a per share
exercise price of 100% of the fair market value of a share of Class A common
stock on the date of grant -- 110% in the case of an incentive stock option
granted to a more-than-10% stockholder. Options granted under the restricted
stock plan have a term of up to 10 years from the date of grant -- up to five
years in the case of an incentive stock option granted to a more-than-10%
stockholder. However, an option granted under the restricted stock plan will
terminate no later than one year after the optionee's termination of employment
on account of death or disability, or three months after the optionee's
termination of employment for a reason other than death or disability. Each
option granted under the restricted stock plan vests on the same schedule as
the restricted stock award to which the option relates, which may be
accelerated by the committee at the time of grant and at any time thereafter.
The exercise price and tax withholding obligations may be paid in various
methods, including surrendering previously acquired shares of Class A common
stock.
Duration and Amendment of Restricted Stock Plan. The restricted stock plan
will terminate in September 2006. Pegasus' board of directors may amend,
suspend or terminate the restricted stock plan, and the restricted stock plan
administrator may amend any outstanding restricted stock awards, at any time.
Nevertheless, certain amendments listed in the restricted stock plan require
stockholder approval. Examples of amendments which require stockholder approval
include an increase in the number of shares authorized under the restricted
stock plan, and a change in the class of employees eligible to receive
incentive stock options under the restricted stock plan. A grantee must approve
any suspension, discontinuance or amendment, if such action would materially
impair the rights of the grantee under any restricted stock award previously
granted to him.
Federal Income Tax Treatment of Options. Please refer to the federal tax
consequences described in Proposal 3.
Restricted Stock Awards. The following special recognition awards and
discretionary awards were made under the restricted stock plan in 1999:
41
<PAGE>
<TABLE>
<CAPTION>
Name and Position Amount of Award
- ----------------- -----------------
<S> <C>
Marshall W. Pagon, President and Chief Executive Officer ................................ $124,978
Ted S. Lodge, Senior Vice President, Chief Administrative Officer, General Counsel, and
Secretary .............................................................................. 104,068
Robert N. Verdecchio, Senior Vice President, Chief Financial Officer and Assistant 99,967
Secretary
Howard E. Verlin, Vice President, Cable and Satellite Television and Assistant Secretary 144,974
Nicholas A. Pagon, Vice President ....................................................... --
--------
Executive Group ......................................................................... 473,987
Non-Executive Director Group ............................................................ N/A(1)
Non-Executive Officer Employee Group .................................................... --
--------
Total ................................................................................ $473,987
========
</TABLE>
- ------------
(1) Non-executive directors are not eligible to receive awards under the
restricted stock plan.
The following profit sharing awards were made under the restricted stock
plan in 1999 on the basis of 1998 results.
<TABLE>
<CAPTION>
Name and Position Amount of Award
- ----------------- ----------------
<S> <C>
Marshall W. Pagon, President and Chief Executive Officer ................................ N/A(1)
Ted S. Lodge, Senior Vice President, Chief Administrative Officer, General Counsel, and
Secretary .............................................................................. N/A(1)
Robert N. Verdecchio, Senior Vice President, Chief Financial Officer and Assistant
Secretary ............................................................................ N/A(1)
Howard E. Verlin, Vice President, Cable and Satellite Television and Assistant Secretary N/A(1)
Nicholas A. Pagon, Vice President ....................................................... N/A(1)
Executive Group ......................................................................... N/A(1)
Non-Executive Director Group ............................................................ N/A(1)
Non-Executive Officer Employee Group .................................................... $585,760
------------
Total ................................................................................ $585,760
============
</TABLE>
- ------------
(1) Pegasus' executive officers and non-executive directors are not eligible to
receive profit sharing awards under the restricted stock plan.
Registration Statement on Form S-8. The 350,000 shares of Class A common
stock that may be currently granted under the restricted stock plan have been
registered for sale under the Securities Act, pursuant to a registration
statement on Form S-8. If the proposal to increase the number of shares covered
by the restricted stock plan is approved, we intend to file with the SEC an
amendment to the registration statement on Form S-8 to register the additional
shares of Class A common stock that may be granted under the plan.
PROPOSAL 3: AMENDMENT TO STOCK OPTION PLAN
The stock option plan provides for the issuance of up to 1,300,000 shares
of Class A common stock pursuant to options granted under the plan. Options to
acquire an aggregate of approximately 1,363,575 shares of Class A common stock
are currently outstanding, including options to acquire 63,575 shares which are
subject to the approval of this proposal.
We adopted the stock option plan to further our growth and success by
providing an incentive to eligible employees and directors which increases
their direct involvement in our future success.
Pegasus' board of directors is proposing that the stock option plan be
amended to provide for an increase in the maximum number of shares of Class A
common stock which may be granted under the stock option plan from 1,300,000 to
3,000,000 and to increase the maximum number of shares of Class A common stock
that may be issued under options granted to any employee from 550,000 to
1,000,000. In proposing this amendment, Pegasus' board of directors took into
consideration the number of options already granted under
42
<PAGE>
the plan, the number of options that will need to be issued under the stock
option plan to replace outstanding options to purchase Golden Sky common stock
and the number of additional non-employee directors that will result upon
consummation of the merger. The increase is also needed because Pegasus has
already issued options covering nearly all of the shares of Class A common
stock authorized under the plan. The amendment makes other changes to the stock
option plan for which stockholder approval is not required and is not being
sought. The text of the proposed amendment is attached as Annex IV to this
proxy statement/prospectus.
The proposal requires the affirmative vote of holders of shares
representing a majority of the voting power of the outstanding shares of
Pegasus' common stock present, in person or by proxy, at the meeting. The Class
A and Class B common stock will vote together as a single class.
Pegasus' board of directors unanimously recommends voting "for" proposal
3.
Stock Option Plan
Employees of Pegasus are eligible to receive incentive stock options, as
described in Section 422 of the Internal Revenue Code, and nonqualified stock
options under the stock option plan. Incentive stock options offer employees
certain tax advantages, discussed below, which are not available under
nonqualified stock options. Employees are eligible to receive discretionary
option grants, determined at the discretion of a committee, and 100-share
formula options under the stock option plan. Non-employee directors are
eligible to receive discretionary nonqualified stock options under the stock
option plan. All of our non-employee directors and approximately 1,006 full
time and 347 part time employees are eligible to receive options under the
stock option plan. After the merger, nine non-employee directors will be
eligible to receive options under the stock option plan.
Class A Common Stock Available. Options may be granted under the stock
option plan to purchase up to 1,300,000 shares of Class A common stock
(proposed to be increased to 3,000,000). However, no employee may be granted
options covering more than 550,000 shares of Class A common stock under the
stock option plan (proposed to be increased to 1,000,000). Both of these limits
are subject to adjustment for certain changes in Pegasus' structure or
capitalization such as stock splits, combinations, etc.
Administration. The stock option plan is administered by a committee of
not fewer than two directors of Pegasus, if the grantee is an executive officer
or a non-employee director. For an employee who is not an executive officer,
the committee consists of members of management who are appointed by Pegasus'
board. Employees and non-employee directors selected by the committee
administering the stock option plan are eligible to receive discretionary
options based on an employees' or non-employee director's contribution to the
achievement of our objectives and other relevant matters.
Terms and Conditions of Discretionary Options. When an option is granted
at the discretion of the committee administering the stock option plan, the
committee determines the terms of the option, including the number of shares of
Class A common stock subject to the option and the exercise price. However, the
option term may not exceed ten years, and the per share exercise price may not
be less than the fair market value of a share of Class A common stock on the
date the option is granted. Options automatically become exercisable upon a
"change of control," as defined in the stock option plan.
The committee administering the stock option plan may also provide that
the term of an option will be shorter than it otherwise would have been if an
optionee terminates employment or board of directors membership, for any
reason, including death or disability. However, an incentive stock option will
expire no later than:
o three months after termination of employment for a reason other than
death or disability; or
o one year after termination of employment on account of disability.
Also, no option may be exercised more than three years after an optionee's
death.
The exercise price and tax withholding obligations on exercise may be paid
in various methods, including a cash payment and/or surrendering shares subject
to the option or previously acquired shares of Class A common stock.
43
<PAGE>
Terms and Conditions of Formula Options. Each full-time employee who is
not an executive officer automatically receives an option to purchase 100
shares of Class A common stock on the later of December 18, 1998, or the date
he or she first becomes a full-time employee. Options currently granted under
the plan are granted as incentive stock options.
Each 100-share option has a per share exercise price of 100% of the fair
market value of a share of Class A common stock on the date of grant -- 110% in
the case of an incentive stock option granted to a more-than-10% stockholder --
and a term of ten years from the date of grant -- five years in the case of an
incentive stock option granted to a more-than 10% stockholder. However, each
100-share option will terminate no later than one year after the optionee's
termination of employment on account of death or disability, or three months
after the optionee's termination of employment for a reason other than death or
disability.
Effective April 23, 1999, each 100-share option, if not already vested,
becomes fully vested on the earlier of the date the optionee completes one year
of service, or the first anniversary of the date the option is granted. A
100-share option will also become fully vested upon a change of control, as
defined in the stock option plan, or upon the optionee's death or disability
while employed by Pegasus.
The exercise price and tax withholding obligations may be paid in various
methods, including a cash payment and/or surrender of previously acquired
shares of Class A common stock.
Golden Sky Options and Warrants. Subject to the effectiveness of the
merger, certain outstanding Golden Sky options and warrants will be exercisable
under the stock option plan in accordance with their terms, and will not be
subject to any inconsistent provisions of the stock option plan.
Duration and Amendment of Stock Option Plan. The stock option plan will
terminate in September 2006 -- ten years after it was adopted by Pegasus' board
of directors. Pegasus' board of directors may amend, suspend or terminate the
stock option plan, and the committee administering the stock option plan may
amend any outstanding options, at any time. Nevertheless, certain amendments
listed in the stock option plan require stockholder approval. Examples of
amendments which require stockholder approval include an amendment increasing
the number of shares which may be subject to options, an amendment increasing
the limit on shares subject to options granted to any employee and an amendment
increasing the duration of the stock option plan with respect to incentive
stock options. Further, an optionee must approve any suspension, discontinuance
or amendment, if such action would materially impair the rights of the optionee
under any option previously granted to him or her.
Transferability. Options granted under the stock option plan generally are
not transferable, except by will or under the laws of descent and distribution.
However, the committee has the authority to permit an optionee to transfer his
or her discretionary nonqualified stock option, for no consideration, to his or
her immediate family members or a trust or partnership for the benefit of
immediate family members.
Market Value. As of February 24, 2000, the closing sale price of the Class
A common stock on the Nasdaq National Market was $118 5/8.
Federal Income Tax Treatment of Options.
Incentive Stock Options. If the requirements of Section 422 of the
Internal Revenue Code are met, an optionee recognizes no income upon the grant
or exercise of an incentive stock option, unless the alternative minimum tax
rules apply, and Pegasus is not entitled to a deduction.
Nonqualified stock options. An optionee recognizes no income at the time
a nonqualified stock option is granted. Upon exercise of a nonqualified stock
option, the optionee recognizes ordinary income for federal income tax purposes
in an amount generally measured as the excess of the then fair market value of
Class A common stock over the exercise price. Subject to Section 162(m) of the
Internal Revenue Code, Pegasus will be entitled to a tax deduction in the
amount and at the time that an optionee recognizes ordinary income with respect
to a nonqualified stock option.
Option Grants. As of December 31, 1999, the following options have been
granted under the stock option plan:
44
<PAGE>
<TABLE>
<CAPTION>
Name and Position Number of Options(1)
- ----------------- ----------------------
<S> <C>
Marshall W. Pagon, President and Chief Executive Officer ................................ 360,000
Ted S. Lodge, Senior Vice President, Chief Administrative Officer, General Counsel, and
Secretary .............................................................................. 185,000
Robert N. Verdecchio, Senior Vice President, Chief Financial Officer and Assistant
Secretary.............................................................................. 150,000
Howard E. Verlin, Vice President, Cable and Satellite Television and Assistant Secretary 175,000
Nicholas A. Pagon, Vice President ....................................................... 85,000
Executive Group ......................................................................... 955,000(2)
Non-Executive Director Group ............................................................ 100,000
Non-Executive Officer Employee Group .................................................... 308,575(3)
---------
Total ................................................................................. 1,363,575
===========
</TABLE>
- ------------
(1) Reflects the number of shares issuable upon exercise of the option grants.
(2) Includes an option to purchase 38,575 shares, which is subject to the
approval of this proposal.
(3) Includes an option to purchase 25,000 shares, which is subject to the
approval of this proposal.
Registration Statement on Form S-8. If the proposal to increase the
number of shares covered by the stock option plan is approved, we intend to
file with the SEC an amendment to the registration statement on Form S-8 to
register all shares of Class A common stock that may be issued pursuant to the
plan.
PROPOSAL 4: AMENDMENT TO CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF CLASS A COMMON STOCK FROM 50,000,000 TO 250,000,000 SHARES
Pegasus' board of directors is proposing an amendment to Article Fourth of
Pegasus' certificate of incorporation, as amended, increasing the number of
authorized shares of Class A common stock, par value $0.01 per share, from
50,000,000 to 250,000,000 shares. The text of the proposed amendment is
attached as Annex V to this proxy statement/prospectus. For convenience, Annex
V reflects the amendments proposed in Proposals 4, 5, 6 and 7, although those
proposals are not contingent on one another.
As of February 25, 2000, 15,895,968 shares of Class A common stock were
outstanding. Of the approximately 34.1 million shares available for issuance,
over approximately 18.7 million shares have been either reserved for issuance
or are expected to be issued, after giving effect to Pegasus' employee benefit
plans, conversion of the outstanding shares of Class B common stock and
outstanding shares of convertible preferred stock, exercise of outstanding
warrants and options, and shares issued in connection with the Golden Sky
merger.
The board of directors believes that the proposed additional 200,000,000
shares of authorized Class A common stock will provide Pegasus with needed
flexibility to issue Class A common stock for proper corporate purposes which
may be identified in the future, such as to raise equity capital or issue
convertible debt, to make acquisitions through the issuance of Class A common
stock, to adopt additional employee benefit plans or reserve additional shares
for issuance under such plans or to effect a stock split or stock dividend of
Class A common stock. Although Pegasus continually evaluates alternatives for
raising capital and acquisition opportunities and conducts preliminary
discussions in connection with acquisitions, Pegasus has no present agreements,
arrangements or commitments with respect to any financing or acquisition that
are dependent on increasing the currently authorized number of shares of Class
A common stock. The authorization of the additional shares will enable Pegasus
to continue to consider such alternatives and opportunities and to act promptly
if appropriate circumstances arise which require the issuance of such shares.
If the proposal is not approved to increase the authorized shares of Class
B common stock, Pegasus will be limited in effecting any stock splits or stock
dividends on the Class A common stock since stock splits or dividends on Class
A common stock can only be made in connection with similar splits or dividends
of Class B common stock on shares of Class B common stock.
45
<PAGE>
The authorization of additional shares of Class A common stock of Pegasus
will not, by itself, have any effect on the rights of holders of existing
stock. Depending on the circumstances, any issuance of additional shares of
Class A common stock could affect the existing holders of shares of Class A
common stock by diluting the per share earnings, book value per share and the
voting power of the outstanding shares of Class A common stock. Under Pegasus'
certificate of incorporation, Pegasus' stockholders do not have preemptive
rights to acquire capital stock which may be issued by Pegasus.
Although Pegasus' certificate of incorporation and by-laws do not have
specific provisions designed to discourage certain transactions involving a
change in control of Pegasus, its capital structure could prevent a change of
control of Pegasus. Under Pegasus' current capital structure, Mr. Pagon
beneficially owns all of the Class B common stock. The Class B common stock is
entitled to 10 votes per share. Therefore, Mr. Pagon controls the majority of
Pegasus' voting power and has the ability to prevent any reasonably foreseeable
attempt to acquire Pegasus through a merger, consolidation, sale of assets or
successful tender offer.
Although Pegasus' board of directors is not proposing the authorization of
the additional shares of Class A common stock as an "anti-takeover" device, it
is possible that such additional shares could be used to discourage or impede a
tender offer or other attempt to gain control of Pegasus. For example, in the
event of a hostile attempt to take over control of Pegasus, it may be possible
for Pegasus to impede the attempt by issuing shares of the Class A common
stock, thereby diluting the voting power of the other outstanding shares and
increasing the potential cost to acquire control of Pegasus. Alternatively, the
stock could be privately placed with purchasers who would support the board in
opposing a hostile takeover attempt. Such devices could deter certain types of
transactions that might be proposed, whether or not such transactions were
favored by the majority of the stockholders, and could enhance the ability of
Pegasus' officers and directors to retain their positions.
If the 200,000,000 additional shares of Class A common stock are
authorized, no further action or authorization by Pegasus' stockholders will be
necessary prior to the issuance of such shares of Class A common stock, except
as might be required for a particular transaction by applicable law or by
agreements with or policies of any exchange or market on which Pegasus'
securities are listed or traded. The board of directors has no present plans
with respect to the issuance of any of the additional shares of Class A common
stock proposed to be authorized.
The affirmative vote of holders of a majority of the total voting power of
the outstanding shares of Class A common stock and Class B common stock, voting
together as a single class, is required to approve the amendment to the
certificate of incorporation.
The board of directors recommends voting "for" proposal 4.
PROPOSAL 5: AMENDMENT TO CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF CLASS B COMMON STOCK FROM 15,000,000 TO 30,000,000 SHARES
Pegasus' board of directors is proposing an amendment to Article Fourth of
Pegasus' certificate of incorporation, as amended, increasing the number of
authorized shares of Class B common stock, par value $0.01 per share, from
15,000,000 to 30,000,000 shares. The text of the proposed amendment is attached
as Annex V to this proxy statement/prospectus. For convenience, Annex V
reflects the amendments proposed in Proposals 4, 5, 6 and 7, although those
proposals are not contingent on one another.
If the 15,000,000 additional shares of Class B common stock are
authorized, no further action or authorization by Pegasus' stockholders will be
necessary prior to the issuance of such shares of Class B common stock in
connection with a stock split or dividend or similar transaction. However, any
other issuance of Class B common stock would require the approval of the
holders of Class A common stock and Class B common stock voting separately and
not as a single class.
As of February 25, 2000, 4,581,900 shares of Class B common stock were
outstanding. If the board of directors decides to issue additional shares of
Class A common stock in connection with a stock split, stock dividend or
similar transaction, Pegasus' certificate of incorporation requires that
parallel action be
46
<PAGE>
simultaneously taken with respect to the Class B common stock so as not to
affect the relative voting percentages of the holders of Class A and Class B
common stock. The purpose of the amendment is to have enough Class B common
stock available for this purpose. In fact, Pegasus will be limited in its
ability to effect a stock split of its Class A common stock unless the
authorized shares of Class B common stock are increased. To date, the board of
directors has not decided to do any such transaction.
The authorization of additional shares of Class B common stock of Pegasus
will not, by itself, have any effect on the rights of holders of existing
stock. Any issuance of additional Class B Common Stock requires the vote of
Class A common stock unless the issuance is in connection with a stock dividend
or stock split (which would not affect the relative economic and voting rights
of the two classes). Depending on the circumstances, any issuance of additional
shares of Class B common stock could affect the existing holders of shares of
Class A common stock by diluting the per share earnings, book value per share
and the voting power of the outstanding shares of Class A common stock. Under
Pegasus' certificate of incorporation, Pegasus' stockholders do not have
preemptive rights to acquire capital stock which may be issued by Pegasus.
Although Pegasus' certificate of incorporation and by-laws do not have
specific provisions designed to discourage certain transactions involving a
change in control of Pegasus, its capital structure could prevent a change of
control of Pegasus. Under Pegasus' current capital structure, Mr. Pagon
beneficially owns all of the Class B common stock. The Class B common stock is
entitled to 10 votes per share. Therefore, Mr. Pagon controls the majority of
Pegasus' voting power and has the ability to prevent any reasonably foreseeable
attempt to acquire Pegasus through a merger, consolidation, sale of assets or
successful tender offer.
Although Pegasus' board of directors is not proposing the authorization of
the additional shares of Class B common stock as an "anti-takeover" device, it
is possible that such additional shares could be used to discourage or impede a
tender offer or other attempt to gain control of Pegasus. For example, in the
event of a hostile attempt to take over control of Pegasus, it may be possible
for Pegasus to impede the attempt by issuing shares of the Class B common
stock, thereby diluting the voting power of the other outstanding shares and
increasing the potential cost to acquire control of Pegasus. Such a device
could deter certain types of transactions that might be proposed, whether or
not such transactions were favored by the majority of the stockholders, and
could enhance the ability of Pegasus' officers and directors to retain their
positions.
The affirmative vote of holders of a majority of the total voting power of
the outstanding shares of Class A common stock and Class B common stock, voting
separately and not as a single class, is required to approve the amendment to
the certificate of incorporation.
Pegasus' board of directors recommends voting "for" proposal 5.
PROPOSAL 6: AMENDMENT TO CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF NON-VOTING COMMON STOCK FROM 20,000,000 TO 200,000,000
SHARES
Pegasus' board of directors is proposing an amendment to Article Fourth of
Pegasus' certificate of incorporation, as amended, increasing the number of
authorized shares of non-voting common stock, par value $0.01 per share, from
20,000,000 to 200,000,000 shares. The text of the proposed amendment is
attached as Annex V to this proxy statement/prospectus. For convenience, Annex
V reflects the amendments proposed in Proposals 4, 5, 6 and 7 although those
proposals are not contingent on one another.
As of February 25, 2000, no shares of non-voting common stock were
outstanding.
The board of directors believes that the proposed additional 180,000,000
shares of authorized non-voting common stock will provide Pegasus with needed
flexibility to issue non-voting common stock for proper corporate purposes
which may be identified in the future, such as to raise equity capital or issue
convertible debt, to make acquisitions through the issuance of non-voting
common stock, to adopt additional employee benefit plans or reserve additional
shares for issuance under such plans or to pay a stock dividend of non-voting
common stock on its common stock. Although Pegasus continually evaluates
alternatives for raising capital and acquisition opportunities and conducts
preliminary discussions in connection with acquisitions, Pegasus has no present
agreements, arrangements or commitments with respect to any financing
47
<PAGE>
or acquisition that are dependent on increasing the currently authorized number
of shares of non-voting common stock. The authorization of the additional
shares will enable Pegasus to continue to consider such alternatives and
opportunities and to act promptly if appropriate circumstances arise which
require the issuance of such shares.
The authorization of additional shares of non-voting common stock of
Pegasus will not, by itself, have any effect on the rights of holders of
existing stock. Depending on the circumstances, any issuance of shares of
non-voting common stock could affect the existing holders of shares of Class A
common stock by diluting the per share earnings, book value per share and the
voting power of the outstanding shares of Class A common stock. Under Pegasus'
certificate of incorporation, Pegasus' stockholders do not have preemptive
rights to acquire capital stock which may be issued by Pegasus.
Although Pegasus' certificate of incorporation and by-laws do not have
specific provisions designed to discourage certain transactions involving a
change in control of Pegasus, its capital structure could prevent a change of
control of Pegasus. Under Pegasus' current capital structure, Mr. Pagon
beneficially owns all of the Class B common stock. The Class B common stock is
entitled to 10 votes per share. Therefore, Mr. Pagon controls the majority of
Pegasus' voting power and has the ability to prevent any reasonably foreseeable
attempt to acquire Pegasus through a merger, consolidation, sale of assets or
successful tender offer.
If the 180,000,000 additional shares of non-voting common stock are
authorized, no further action or authorization by Pegasus' stockholders will be
necessary prior to the issuance of such shares of non-voting common stock,
except as might be required for a particular transaction by applicable law or
by agreements with or policies of any exchange or market on which Pegasus'
securities are listed or traded. The board of directors has no present plans
with respect to the issuance of any of the additional shares of non-voting
common stock proposed to be authorized.
The affirmative vote of holders of a majority of the total voting power of
the outstanding shares of Class A common stock and Class B common stock voting
together as a single class, is required to approve the amendment to the
certificate of incorporation.
Pegasus' board of directors recommends voting "for" proposal 6.
PROPOSAL 7: AMENDMENT TO CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF PREFERRED STOCK FROM 5,000,000 TO 20,000,000 SHARES
Pegasus' board of directors is proposing an amendment to Article Fourth of
Pegasus' certificate of incorporation, as amended, increasing the number of
authorized shares of preferred stock, par value $0.01 per share, from 5,000,000
to 20,000,000 shares. The text of the proposed amendment is attached as Annex V
to this proxy statement/prospectus. For convenience, Annex V reflects the
amendments proposed in Proposals 4, 5, 6 and 7, although those proposals are
not contingent on one another.
As of February 25, 2000, of the 5,000,000 shares of preferred stock that
we are authorized to issue, approximately 143,684 shares have been designated
as Series A preferred stock, 5,707 shares have been designated as Series B
junior convertible participating preferred stock, 3,000,000 shares have been
designated as Series C convertible preferred stock, 22,500 shares have been
designated as Series D junior convertible participating preferred stock and
10,000 shares have been designated as Series E junior convertible participating
preferred stock. For more information regarding the rights, privileges and
preferences of these different series of preferred stock, see Description of
Capital Stock.
Pegasus' board of directors believes that the proposed additional
15,000,000 shares of authorized preferred stock will provide Pegasus with
needed flexibility in pursuing future financing opportunities or acquisitions
or for such other proper corporate purposes as may be identified in the future.
Pegasus could enter into financing arrangements that involve the issuance of
depository shares representing interests in Pegasus' preferred stock. This
would serve to reduce the number of shares of preferred stock needed for such
financings. However, the issuance of depository shares is more cumbersome and
expensive to Pegasus than the issuance of preferred stock. Pegasus has no
present agreements, arrangements or commitments with
48
<PAGE>
respect to any financing arrangements or acquisitions that are dependent on
increasing the currently authorized number of shares of preferred stock. The
authorization of the additional shares will enable Pegasus to continue to
consider such alternatives and opportunities and to act promptly if appropriate
circumstances arise which require the issuance of such shares.
The authorization of additional shares of preferred stock will not, by
itself, have any effect on the rights of holders of existing stock. Depending
on the circumstances, any issuance of additional shares of preferred stock, in
one or more series, could affect the existing holders of shares of Class A
common stock, Class B common stock and Series B, Series D and Series E junior
convertible participating preferred stock by designating preferred stock which
has voting, dividend, liquidation and other rights, privileges and preferences
over the Class A common stock, the Class B common stock and the Series B,
Series D and Series E junior convertible participating preferred stock.
Although Pegasus' certificate of incorporation and by-laws do not have
specific provisions designed to discourage certain transactions involving a
change in control of Pegasus, its capital structure could prevent a change of
control of Pegasus. The certificates of designation for the Series A preferred
stock and Series C convertible preferred stock place certain restrictions on
Pegasus' ability to enter into a change of control transaction. See Description
of Capital Stock -- Description of Series A Preferred Stock and -- Series C
Convertible Preferred Stock. Future designations and issuances of additional
series of preferred stock could place similar or other restrictions on Pegasus'
ability to enter into change of control transactions.
Although the board of directors is not proposing the authorization of the
additional shares of preferred stock as an "anti-takeover" device, it is
possible that such preferred stock could be used to discourage or impede a
tender offer or other attempt to gain control of Pegasus, whether or not such
transactions were favored by the majority of the stockholders, and could
enhance the ability of Pegasus' officers and directors to retain their
positions.
If the 15,000,000 additional shares of preferred stock are authorized, no
further action or authorization by Pegasus's stockholders will be necessary
prior to the designation and issuance of such shares of preferred stock, except
as might be required for a particular transaction by applicable law or by
agreements with or policies of any exchange or market on which Pegasus'
securities are listed or traded. Pegasus' board of directors has no present
plans with respect to the designation and issuance of any of the additional
shares of preferred stock proposed to be authorized.
The affirmative vote of holders of a majority of the total voting power of
the outstanding shares of Class A common stock and Class B common stock, voting
together as a single class, and the approval of the Series A preferred stock
and Series C convertible preferred stock voting together as a single class is
required to approve this amendment to the certificate of incorporation. Pegasus
intends to solicit written consents to the amendment directly from holders of
its preferred stock. It is possible that Pegasus will pay a consent fee in an
amount to be determined to consenting holders. No consent fee will be paid to
any holder of common stock.
Pegasus' board of directors recommends voting "for" proposal 7.
PROPOSAL 8: OTHER MATTERS
Pegasus' board of directors knows of no matters to be presented for action
at the special meeting other than those set forth in the attached notice and
customary procedural matters. However, if any other matters should properly
come before the meeting or any adjournments or postponements thereof, the
proxies solicited hereby will be voted on such matters, to the extent permitted
by the rules and regulations of the SEC, in accordance with the judgment of the
persons voting such proxies.
49
<PAGE>
THE MERGER
The following is a brief summary of the material provisions of the merger
agreement and related transactions and agreements, including the voting
agreement and registration rights agreement. This summary is qualified in its
entirety by reference to the full and complete text of the merger agreement,
the voting agreement and the registration rights agreement. A copy of the
merger agreement, as amended, and the form of voting agreement are attached as
Annexes I and II to this proxy statement/prospectus. All of these documents are
incorporated herein by reference.
The Merger Agreement
When the merger becomes effective, Golden Sky will become a wholly-owned
subsidiary of Pegasus.
Conversion of Golden Sky Capital Stock
When the merger becomes effective, stockholders of Golden Sky will receive
the following amount of Pegasus' Class A common stock in total:
o 6,500,000 shares, minus
o up to 280,741 shares, depending on how many shares of Golden Sky stock
Pegasus is required to purchase from Golden Sky stockholders as described
below, minus
o the number of shares covered by stock options that Pegasus will issue to
replace existing Golden Sky stock options and warrants, currently
estimated at 414,667 shares, minus
o shares that would otherwise be issued to Golden Sky stockholders who
exercise their dissenters' appraisal rights.
The Golden Sky stockholders have also agreed to bear the costs of
investment banking, brokerage and financial advisory services to Golden Sky and
its stockholders in connection with the merger. If they do not pay these costs
before the merger becomes effective, the amount of the costs will be deducted
from the Pegasus stock received by the Golden Sky stockholders. The deduction
will be based on the average closing price of the Pegasus Class A common stock
for the last five trading days before the merger is completed.
No Pegasus stock will be issued on account of any Golden Sky stock owned
by Pegasus or held in treasury. This will not further reduce the total shares
Pegasus will issue. No Pegasus stock will be issued on account of dissenting
Golden Sky shares; this will reduce the total shares Pegasus will issue.
Pegasus may deduct, withhold, and be credited for such amounts as required
under the Internal Revenue Code or any other provision of tax law in connection
with the shares of Pegasus stock to be issued in the merger. When the merger
becomes effective, Golden Sky's stock transfer books will be closed without any
further registration of Golden Sky's capital stock on the records of Golden
Sky.
Cash Purchases of Golden Sky Stock by Pegasus
Pegasus has agreed in the merger agreement to purchase for cash Golden Sky
stock from stockholders that Golden Sky designates to Pegasus. The purchase is
to occur shortly after the Hart-Scott-Rodino waiting period for the merger
expires or is terminated early. The purchase price will be up to $25.0 million,
depending on how many shares of Golden Sky the selling stockholders want to
sell. The minimum percentage of Golden Sky stock that Pegasus will own on a
fully diluted basis as a result of the purchase will be approximately 4.3% if
Pegasus is required to pay the full $25.0 million, and proportionately less if
Golden Sky stockholders want to sell less.
Any amount that Pegasus pays for Golden Sky stock under this agreement
will reduce the number of shares Pegasus will issue to the remaining Golden Sky
stockholders at the closing of the merger. The reduction will be based on a
Pegasus per-share price of $89.05, which was the average closing price for the
five trading days before the parties signed the merger agreement. If Pegasus
pays the full $25.0 million, the reduction will be 280,471 shares of Pegasus
Class A common stock.
50
<PAGE>
Conversion Ratios
The total number of shares of Pegasus' Class A common stock to be received
by each stockholder of Golden Sky will depend upon the class and series of
Golden Sky stock held, as described below. This description has been furnished
by Golden Sky.
In determining the conversion ratio for Golden Sky's Series A and Series B
convertible participating preferred stock, each share is effectively treated as
if it had been converted, on the closing date of the merger, into:
o the number of shares of Golden Sky common stock into which it could be
converted in accordance with the conversion provisions of Golden Sky's
certificate of incorporation; and
o one share of Golden Sky's Series A or B redeemable preferred stock,
respectively.
To provide the redeemable preferred stock component, the stockholders will
receive, for each share of convertible participating preferred stock, shares of
Pegasus' Class A common stock having a value, based upon its market price on
the closing date, equal to the liquidation preference amount of the convertible
participating preferred stock as defined in Golden Sky's certificate of
incorporation. The liquidation preference amount for each share of the Series A
and B convertible participating preferred stock will be $100 for Series A and
$200 for Series B, plus accrued dividends.
Although there are currently no outstanding shares of Golden Sky's Series
A, B or D redeemable preferred stock, Golden Sky could be required to issue
shares of these series on or before the closing date. Shares of Series A and B
redeemable preferred stock which actually are outstanding as of the closing
date, if any, will be converted into the number of shares of Pegasus' Class A
common stock having a value equal to the redemption price of the Series A or B
redeemable preferred stock. Any outstanding shares of Series D redeemable
preferred stock as of the closing date will be converted into the number of
shares of Pegasus' Class A common stock having a value equal to the preferred
liquidation preference amount of the Series D redeemable preferred stock.
After the allocation describd above, the remaining shares of Pegasus'
Class A common stock to be issued in the merger transaction will be allocated,
pro rata, among:
o the outstanding shares of Golden Sky common stock;
o the shares of common stock that would be issuable upon conversion on the
closing date of the outstanding shares of Series A and B convertible
participating preferred stock and the outstanding shares of Series C
senior convertible preferred stock; and
o Golden Sky's outstanding options and warrants as if fully exercised on
the closing date.
As an example of this conversion mechanism, the table below shows how the
merger consideration would be allocated if:
o the closing date were January 10, 2000;
o approximately 6,426,000 shares of Pegasus' Class A common stock were
issued to Golden Sky's stockholders and option and warrant holders as the
aggregate amount of merger consideration, after giving effect to Golden
Sky's estimated transaction costs;
o Golden Sky's stockholders elect not to sell any shares to Pegasus prior
to the closing of the merger;
o no Series D redeemable preferred stock were issued on or before the
closing date; and
o no shares, warrants or options were converted or exercised on or before
the closing date.
This illustration is provided simply to demonstrate how the conversion process
works, and the actual amounts to be received could vary depending on the
closing date, any future issuances or conversions of Golden Sky securities,
adjustments to the merger consideration pursuant to the terms of the merger
agreement and other factors.
51
<PAGE>
<TABLE>
<CAPTION>
Number of Converted Into
Golden Sky Securities Pegasus Class A Common Stock
- ---------------------------------------------------------------- --------------------------------------
<S> <C>
1 share of Series A convertible participating preferred stock 8.036 shares
1 share of Series B convertible participating preferred stock 9.323 shares
1 share of Series C senior convertible preferred stock ......... 7.124 shares
1 share of common stock ........................................ 6.279 shares
Options exercisable for 1 share of common stock ................ Options exercisable for 6.279 shares
Warrants exercisable for 1 share of common stock ............... Warrants exercisable for 6.279 shares
</TABLE>
Fractional Shares
Pegasus will not issue fractional shares in the merger. Instead, Pegasus
will pay cash for the fractional amount based on the average closing price of
the Class A common stock for the last five trading days before the merger is
completed. This calculation will be based on all shares held of record by the
particular holder.
Representations and Warranties
The merger agreement contains representations and warranties relating to
the parties' business and properties and other customary matters.
Certain Covenants
The merger agreement contains certain covenants by the parties between the
date of the merger agreement and the closing of the merger. Among other things,
these covenants limit Golden Sky's ability to engage in acquisitions, amend the
Golden Sky indentures, amend the Golden Sky credit facility, declare or pay
dividends or make other distributions to its stockholders, redeem or repurchase
any stock, issue additional warrants or options to acquire stock, incur
material debt, or make any loans other than in the ordinary course.
For the period following closing, Pegasus has agreed that it will not
amend Golden Sky's certificate of incorporation or bylaws to adversely affect
indemnification rights of directors and officers of Golden Sky relating to
matters before the closing and will maintain insurance coverage for such
matters for a period of six years after the closing date of the merger.
Conditions
All obligations of the parties to the merger agreement will be subject to
the fulfillment by the other party at or prior to closing of, among other
things, each of the following conditions, any of which may be waived by the
respective party in its sole discretion, except as not permitted by law:
o the accuracy of the representations and warranties made by the other
party and the compliance by the other party with applicable covenants;
o the obtaining of all requisite consents or approval by any governmental
authority or other persons, and the expiration or termination of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976;
o the approval of the merger proposal by Pegasus' and Golden Sky's
stockholders;
o the absence of a material adverse change with respect to the other
party;
o the absence of certain litigation or related actions affecting the other
party; and
o the delivery of certain documents by the parties.
Pegasus' obligation to effect the merger is also subject to, among other
things, the following conditions, any of which Pegasus may waive in its sole
discretion, except as prohibited by law:
o the period for the assertion of dissenters' rights pursuant to Section
262 of the Delaware General Corporation Law shall have expired and the
holders of the Golden Sky capital stock entitled to receive no more than
10.0% of Class A common stock to be issued in the merger shall have
perfected their dissenters' appraisal rights under Section 262 of the
Delaware General Corporation Law in connection with the merger; and
52
<PAGE>
o all required third party and shareholder consents having been obtained.
Golden Sky's obligation to effect the merger is also subject to, among
other things, the following conditions, any of which Golden Sky may waive in
its sole discretion, except as prohibited by law:
o The shares of Pegasus Class A common stock issuable in the merger and
those to be reserved for issuance upon exercise of the options and
warrants issued in the replacement of Golden Sky options and warrants
shall have been approved for listing on the Nasdaq National Market upon
official notice of issuance; and
o The registration statement, of which this proxy statement/prospectus is a
part, shall have become effective and no stop order suspending such
effectiveness shall have been issued and remain in effect and no
proceeding for that purpose shall have been instituted.
Termination
The merger agreement may be terminated at any time prior to closing as
provided below.
o By mutual consent of Pegasus and Golden Sky.
o By either party, if any of the other parties have materially breached any
representation, warranty, or covenant contained in the merger agreement,
such other party was notified of the breach and the breach continued
without cure for 30 days after such notice.
o By Golden Sky if:
o Pegasus makes acquisitions outside the DIRECTV distribution business
that reduce its DIRECTV distribution revenues to less than 75.0% of its
total revenues,
o Pegasus disposes of any of its DIRECTV distribution business, except in
connection with the acquisition of other DIRECTV distribution
businesses if the transactions do not result in a net decrease in its
total DIRECTV distribution revenues of greater than 10.0%,
o Pegasus incurs over $50.0 million of additional debt, except in
connection with acquisitions or under its credit facility,
o Pegasus declares or pays dividends or redeems or repurchases its stock,
with certain exceptions, or
o Pegasus enters into certain other transactions involving more than
$50.0 million.
o By either party, if the closing shall not have occurred on or before June
30, 2000, otherwise than because of a breach by the terminating party of
any of its representations, warranties or covenants under the merger
agreement. However, this date can be extended by Golden Sky to as late as
September 30, 2000 under certain limited circumstances.
Survival of Representations and Warranties and Covenants
The representations and warranties of the parties contained in the merger
agreement will not survive closing other than those relating to Golden Sky's
expenses, calculation of Pegasus Class A common stock to be received by Golden
Sky's shareholders and outstanding warrants and options, the validity of the
shares of Pegasus Class A common stock issued to Golden Sky and the parties'
liabilities and financial statements. All of these representations and
warranties will expire six months after the closing unless a breach is asserted
before that date. Some covenants and agreements in the merger agreement will
expire upon closing or termination of the merger agreement, and others survive
indefinitely.
Indemnification Provisions
The Golden Sky stockholders, solely out of the escrow described below,
will be required to indemnify Pegasus and its related parties from certain
matters, including the following:
o breaches of representations and warranties that survive the closing (see
-- Survival of Representations and Warranties and Covenants);
53
<PAGE>
o material misstatements in and omissions from Golden Sky's 1999 annual
report on SEC Form 10-K when filed;
o any failure by Golden Sky to comply with certain satellite legislation;
o any claim that Golden Sky failed to consummate any acquisition in
violation of a legal obligation to do so; and
o specified amounts related to the purchase of certain minority interests.
Indemnification is available to Pegasus and its related parties only for
claims asserted within six months after the closing of the merger, and is
subject to the limitations described below.
Pegasus will be required to indemnify the Golden Sky stockholders and
their related parties from breaches of Pegasus' representations and warranties
that survive the closing (see -- Survival of Representations and Warranties and
Covenants) and from certain material misstatements in and omissions from the
registration statement of which this proxy statement/ prospectus is a part.
Indemnification is available to the Golden Sky indemnitees only for claims
asserted within six months after the closing of the merger, and is subject to
the limitations described below.
The Pegasus indemnitees and the Golden Sky indemnitees will be entitled to
indemnification only if the total of all claims exceed $25.0 million in the
aggregate, in which case indemnification will cover the first $25.0 million as
well as the excess. These limitations do not apply to breaches of
representations and warranties concerning the validity of the shares of
Pegasus' Class A common stock issued to Golden Sky or Golden Sky's outstanding
warrants and options or its liability for investment banking, brokerage and
financial advisory services relating to the merger.
In general, the indemnity obligation of the Golden Sky stockholders is
limited to 975,000 of the shares of Class A common stock issued and received in
the merger. Those shares will be deposited into escrow. Indemnity claims
established in favor of the Pegasus indemnitees will be satisfied only by
delivery of escrowed shares, valued at the average closing price for the five
trading days before the closing date of the merger. The indemnity obligation of
the Golden Sky stockholders is limited to the escrowed shares. These
limitations do not apply to breaches of representations and warranties
concerning outstanding Golden Sky warrants and options or to Golden Sky's
liability for investment banking, brokerage and financial advisory services
relating to the merger. If shares of Class A common stock are required to be
transferred, any dividends and other distributions previously made on such
shares are required to be transferred as well.
Indemnity claims established in favor of the Golden Sky indemnitees will
be satisfied only by the delivery by Pegasus of additional shares of Class A
common stock, valued at the average closing price for the five trading days
before the closing date of the merger, and are limited to 975,000 additional
shares of Class A common stock. If Pegasus pays any dividend or makes any other
distribution on its Class A common stock before delivering additional shares in
satisfaction of an indemnity claim, it will also be required to deliver the
amount of cash, securities or other property that the Golden Sky indemnitees
would have received if they had owned the additional shares on the date of the
dividend or distribution.
Voting Agreement
In 1998, when Pegasus acquired Digital Television Services, it entered
into a voting agreement with Digital Television Services' principal
stockholders. That voting agreement will be amended at the closing of the
merger to include two of the principal Golden Sky stockholder groups, Alta
Communications VI, L.P. and two of its affiliates, and Spectrum Equity
Investors L.P. and one of its affiliates.
The amended voting agreement will cover:
o all shares of Pegasus common stock held by Mr. Pagon and entities he
controls;
o all shares of Pegasus' Class A common stock received in the merger by
Alta and Spectrum; and
o all shares of Pegasus' Class A common stock received in the 1998
acquisition of Digital Television Services, and still held, by Fleet
Equity Partners and its affiliates.
54
<PAGE>
The original voting agreement also covered Pegasus Class A common stock
acquired by an affiliate of J.H. Whitney & Co. in the acquisition of Digital
Television Services. That affiliate of Whitney disposed of those shares,
however, and no longer has rights under the voting agreement. The original
voting agreement also covered Pegasus Class A common stock acquired by Columbia
Capital Corporation and one of its subsidiaries in the acquisition of Digital
Television Services. Columbia Capital Corporation and its subsidiaries and
their respective owners have sold more than one-half of the shares originally
received by them. Columbia Capital Corporation has therefore lost its right to
designate a director under the voting agreement.
Voting; Size of Pegasus' Board of Directors; Committees
During the term of the amended voting agreement, Pegasus' board of
directors will consist of at least eleven members, unless the size of the board
is reduced as provided below. Of those eleven directors:
o Mr. Pagon will be entitled to designate four;
o Alta will be entitled to designate one;
o Spectrum will designate one;
o Fleet will be entitled to designate one; and
o Three will be independent directors, as defined in the voting agreement.
Each party to the voting agreement will be required to vote all of its covered
shares for such persons' election as directors.
Alta has advised Pegasus that it intends to designate initially Robert F.
Benbow. Spectrum has advised Pegasus that it intends to designate initially
William P. Collatos. Fleet's current designee is Riordon B. Smith. Four
independent directors currently serve on Pegasus' board: James J. McEntee, III,
Mary C. Metzger, Donald W. Weber and William P. Phoenix. Michael C. Brooks, who
was designated by Whitney under the original voting agreement, has advised
Pegasus that he intends to resign from the board at the time of the special
meeting. Harry F. Hopper III, who was designated by Columbia, will continue to
serve following the special meeting. Mr. Pagon's current designees are himself
and Robert N. Verdecchio, and both will continue to serve as such. Mr. Pagon
has advised Pegasus that he intends to designate Ted S. Lodge, an officer of
the Company, as his third designee to the board, to be elected upon Mr.
Brooks's resignation at the time of the special meeting. Mr. Pagon has not yet
decided on his fourth designee.
If any of Alta, Spectrum or Fleet ceases to be entitled to designate a
director, such person's designee will be required to resign at Mr. Pagon's
request, and Pegasus' board of directors, excluding such person's designee,
will determine whether or not to eliminate the directorship held by such
person's designee. See -- Termination. In the event Pegasus' board of directors
determines not to so reduce its size, the nominating committee will nominate an
independent director to fill the vacancy. The parties to the voting agreement
will have no obligation to vote for any such nominee, but will be obligated to
vote for a person who satisfies the voting agreement's definition of
independent director. In the event of an increase in the size of Pegasus' board
of directors, the position so created must be filled by an independent
director, but no party to the voting agreement will have of any obligation to
vote for the nominating committee's nominee to fill such position.
The voting agreement also specifies that committees of Pegasus' board of
directors will consist of an audit committee, a compensation committee, and a
nominating committee. Each committee will consist of one director designated by
a majority of the designees of Alta, Spectrum and Fleet, one of the independent
directors, and one director designated by Mr. Pagon.
Termination
The obligation to vote covered shares as specified in the voting agreement
will terminate as to any covered shares transferred other than to related
persons specified in the voting agreement. In addition, the right of the Alta,
Spectrum and Fleet entities to designate a director terminates when that entity
or various persons related to such entity cease owning one-half of the shares
originally received by each of them in the Digital Television Services merger
or Golden Sky merger, as the case may be. Columbia's designation right has
terminated.
55
<PAGE>
Alta, Spectrum or Fleet will lose its right to designate its director if a
majority of the independent directors determine:
o that its designee commits a breach of fiduciary duty to Pegasus or a
material violation of any federal or state securities law in connection
with the purchase or sale of any of Pegasus' securities;
o that it commits a material violation of any federal or state securities
law in connection with the purchase or sale of any of Pegasus' securities;
o that it violates any noncompetition or confidentiality agreement with
Pegasus;
o that it owns, controls, manages or is financially interested, directly or
indirectly, in any business (other than a less than 5% interest in a
publicly held company) that competes with Pegasus in any geographic area
in which it does business; but this clause will not apply to investments
held on November 8, 1997 (in the case of Fleet) or January 10, 2000 (in
the case of Alta or Spectrum), to any investment in a business that comes
into competition with Pegasus as a result of Pegasus' expansion of its
business by acquisition or otherwise, or to certain investments in
investment funds or pools that may make or hold an investment in a
competitive business, and unless prior to the exercise by a majority of
the independent directors of the right to terminate the stockholder's
right to designate a director, such stockholder is given notice of the
potential applicability of this clause, and fails to cure or modify the
relationship to the satisfaction of a majority of the independent
directors;
o such stockholder violates its voting obligations under the voting
agreement; or
o such person's designee shall take or omit to take any action in his
capacity as a director of Pegasus or member of any committee of Pegasus'
board of directors in a manner materially inconsistent with the voting
agreement, and the person who has the right to designate such director has
not obtained his resignation within 30 days after being requested to do so
by Pegasus' board of directors.
In the event that Alta, Spectrum and Fleet lose their right to designate a
director as provided above, the voting agreement will terminate as to such
stockholders and its voting provisions and requirements concerning the
nominating committee will not apply to such stockholders at the next election
of directors.
Golden Sky Designees
Alta has advised Pegasus that it proposes to designate Robert F. Benbow to
Pegasus' board of directors. Spectrum has advised Pegasus that it intends to
designate William P. Collatos to Pegasus' board of directors.
Robert F. Benbow has been a director of Golden Sky and its predecessors
since February 1997. He is a Vice President of Burr, Egan, Deleage & Co., a
private venture capital firm, and a managing general partner of Alta
Communications, Inc., a private venture capital firm. Prior to joining Burr,
Egan, Deleage & Co. in 1990, Mr. Benbow spent 22 years with the Bank of New
England N.A., where he was a Senior Vice President responsible for special
industries lending in the areas of media, project finance and energy.
Additionally, he serves as a director of Diginet Americas, Inc., a fixed
wireless local loop service provider throughout South America, of Advanced
Telcom Group, Inc., a competitive local exchange carrier, and of Preferred
Networks, Inc., a public paging company.
William P. Collatos has been a director of Golden Sky and its predecessors
since March 1997. He is a managing general partner of Spectrum Equity
Investors, a private equity investment firm focused on the communications
services, networking infrastructure, electronic commerce and media industries,
which he founded in 1993. He serves as a director of Galaxy Telecom, GP, the
general partner of Galaxy Telecom, L.P., which owns, operates and develops
cable television systems, ITXC Corp., a global provider of Internet-based
voice, fax and voice-enabled services, and JazzTel, a competitive local
exchange provider based in Madrid, Spain.
Registration Rights Agreement
On the closing date, a registration rights agreement will be entered into
which will provide certain of Golden Sky's stockholders and possibly certain
members of Golden Sky's senior management with certain registration rights,
including underwritten demand, shelf and piggyback registration rights.
56
<PAGE>
Transfer Restrictions
If the existing registration rights agreement among Pegasus and certain
former stockholders of Digital Television Services is amended as provided in
the merger areement, each person signing the Golden Sky registration rights
agreement will agree in the registration rights agreement not to sell, transfer
or otherwise dispose of any of the shares covered by the registration rights
agreement before six months after the closing of the merger, other than
transfers to permitted transferees or in connection with certain registered
public sales.
Underwritten Demand Registrations
The holders of registration rights will be entitled to two demand
registrations, each covering sales of Class A common stock in an underwritten
public offering. Each demand registration right may be exercised between six
months after the closing of the merger and the fifth anniversary of the
closing. The holders' request must include at least 10% of the Class A common
stock issued in the merger. With certain exceptions, holders will not be
entitled to a demand registration for 360 days after the effective date of a
registration statement filed by Pegasus for an underwritten public offering of
common stock if Pegasus offered to include the holders' shares of Class A
common stock in such registration statement. The holders' underwritten demand
registration rights are subject to certain suspension rights by Pegasus in case
of material developments.
S-3 Shelf Registrations
Each request for a shelf registration may be exercised between six months
after the closing of the merger and the fifth anniversary of the closing date
by holders requesting to include not fewer than 100,000 shares of Class A
common stock. Any shelf registration statement will not be required to remain
effective for more than 180 days and may not be requested earlier than 180 days
after the effective date of any earlier shelf registration. The holders' right
to sell under any shelf registration statement is subject to certain suspension
rights by Pegasus in case of material developments.
Piggyback Registrations
Holders will be entitled to piggyback registration rights, subject to
certain "cut-back" and similar provisions.
Expenses
Pegasus will generally bear registration expenses incurred under the
registration rights agreement with the exception of underwriting commissions
and other similar selling expenses.
Control of Registration Rights
Alta and Spectrum will have complete and absolute discretion to decide
when registration rights are to be exercised, what holders will be included in
or excluded from any registration, how many shares will be included, and how
those shares will be allocated among holders.
Consequences Under Debt Agreements and Preferred Stock Terms
Pegasus intends to designate Golden Sky and its subsidiaries as
unrestricted subsidiaries under the indentures relating to its senior notes and
under the certificate of designation relating to its Series A preferred stock.
The consequences of this are, among other things:
o that Golden Sky will not be subject to compliance with many of the
covenants and operating restrictions imposed by Pegasus' senior notes
indentures and certificate of designation;
o that neither Golden Sky's indebtedness nor the results of its operations
will enter into the determination of Pegasus' ability to incur
indebtedness, pay dividends, or make investments and other restricted
payments;
o that Pegasus and its restricted subsidiaries may not make loans to or
guarantee indebtedness of Golden Sky;
o that Golden Sky may not make loans to or guarantee indebtedness of
Pegasus or any of its restricted subsidiaries; and
57
<PAGE>
o that all transactions between Pegasus and its restricted subsidiaries, on
the one hand, and Golden Sky, on the other hand, must be carried out on
arm's-length terms and, in certain cases, must be supported by a fairness
opinion from an investment banking firm of national standing.
Pegasus' existing direct broadcast satellite business is conducted by
restricted subsidiaries of Pegasus Media & Communications, Inc., a first-tier
subsidiary of Pegasus. The Pegasus Media & Communications notes indenture
requires that transactions between Pegasus Media & Communications and its
subsidiaries, on the one hand, and affiliates of Pegasus Media &
Communications, such as Golden Sky will be after the closing of the merger, on
the other hand, must be carried out on arm's length terms and, in certain
cases, must be supported by a fairness opinion from an investment banking firm
of national standing. The Golden Sky indentures contain similar provisions that
will affect transactions between Golden Sky and Pegasus, Pegasus Media &
Communications and their subsidiaries. Pegasus' credit facility contains
similar requirements regarding arm's-length treatment. The Golden Sky credit
facility prohibits all transactions with Pegasus except allocations of overhead
and other shared expenses.
Because of these provisions, dealings between Golden Sky's direct
broadcast satellite business and Pegasus' other direct broadcast satellite
businesses will need to be carried out with a greater degree of formality than
is normally the case among wholly-owned subsidiaries of a common parent, and
Pegasus will not have the same degree of flexibility to finance Golden Sky's
continuing operations as a parent company not subject to these provisions would
have. This may adversely affect the ability of Pegasus to fully integrate
Golden Sky's business with Pegasus' other direct broadcast satellite business
and may limit the advantages of the merger.
Certain Federal Income Tax Consequences
The following summary of material federal income tax consequences is not
intended to constitute advice regarding the federal income tax consequences of
the merger. This summary does not discuss tax consequences under the laws of
states or local governments or of any other jurisdiction or tax consequences to
categories of stockholders that may be subject to special rules, such as
foreign persons, tax-exempt entities, insurance companies, financial
institutions and dealers in stocks and securities. Each holder of Pegasus'
common stock and/or Golden Sky's capital stock is urged to obtain, and should
rely only upon, his or her own tax advice.
The merger is intended to be a tax-free reorganization for federal income
tax purposes so that no gain or loss will be recognized by Golden Sky's
stockholders, Pegasus' stockholders, Golden Sky or Pegasus, except as a result
of any cash received by certain holders of Golden Sky's capital stock in
connection with their sale to Pegasus of shares of Golden Sky's capital stock
prior to the merger and any cash received in lieu of fractional shares or a
Golden Sky stockholder's exercise of appraisal rights.
Pegasus has received a tax opinion from its counsel to the effect that,
for federal income tax purposes, the merger will constitute a "reorganization"
within the meaning of Section 368(a)(2)(E) of the Internal Revenue Code of
1986, as amended, and that the federal income tax consequences of the merger to
the Golden Sky stockholders, the Pegasus stockholders, Golden Sky and Pegasus
will be as follows:
o No gain or loss will be recognized to the stockholders of Golden Sky upon
their receipt of shares of Class A common stock in exchange for their
Golden Sky capital stock;
o The basis in the shares of Class A common stock to be received by the
stockholders of Golden Sky in the merger will be the same as their basis
in the Golden Sky capital stock exchanged therefor, reduced by the basis
allocable to fractional shares;
o The holding period of the shares of Class A common stock to be received
by the stockholders of Golden Sky will include the period during which
they held their Golden Sky capital stock exchanged therefor, provided such
Golden Sky capital stock was held as a capital asset at the time of the
merger;
o Neither Golden Sky nor Pegasus will recognize gain or loss as a result
of the merger;
58
<PAGE>
o Cash payments received by holders of the Golden Sky capital stock in lieu
of a fractional share will be treated as if a fractional share of Class A
common stock had been issued in the merger and then redeemed by Pegasus
for cash. A holder of Golden Sky capital stock will generally recognize
gain or loss upon such payment, equal to the difference, if any, between
such holder's basis in the fractional share and the amount of cash
received; and
o A holder of Golden Sky capital stock who exercises appraisal rights in
respect to all of such holder's shares will generally recognize gain or
loss for federal income tax purposes, measured by the difference between
the holder's basis in such shares and the amount of cash received,
provided that the payment is not essentially equivalent to a dividend
within the meaning of Section 302 of the Internal Revenue Code, which will
be the case if the dissenting stockholder does not directly or
constructively own any shares of Class A common stock or Golden Sky
capital stock after the merger. Such gain or loss will be a capital gain
or loss, provided that such shares are held as a capital asset at the time
of the merger. If the payment is essentially equivalent to a dividend, it
will be treated as ordinary income to the extent of Golden Sky's current
and accumulated earnings and profits, and any remaining amount will first
be applied against the holder's basis in his, her, or its shares and will
then be treated as gain from the exchange of property, as described above.
The parties are not requesting a ruling from the Internal Revenue Service
in connection with the merger. The tax opinion delivered by Drinker Biddle &
Reath LLP neither binds the Internal Revenue Service or the courts nor
precludes the Internal Revenue Service from adopting a contrary position. In
addition, the tax opinion is subject to certain assumptions and qualifications
and is based on the truth and accuracy of certain representations made by
Golden Sky and Pegasus. Of particular importance are those assumptions and
representations relating to the "continuity of interest," "control" and
"continuity of business enterprise" requirements.
To satisfy the "continuity of interest" requirement, Golden Sky's
stockholders must not, pursuant to a plan or intent existing at or prior to the
merger, sell or otherwise transfer to Pegasus or a party related to Pegasus so
much of either their Golden Sky capital stock prior to the merger or their
shares of Class A common stock to be received in the merger, such that the
Golden Sky stockholders, as a group, would no longer have a substantial
proprietary interest in the Golden Sky business being conducted by Pegasus
after the merger. This includes, among other things, shares sold to Pegasus
before the merger and shares disposed of pursuant to the exercise of
dissenters' or appraisal rights, but will not include sales on the Nasdaq
National Market. Golden Sky's stockholders will generally be regarded as having
retained a substantial proprietary interest as long as the shares of Class A
common stock received in the merger, after reduction for any dispositions
described above, in the aggregate, represent at least 50% of the entire
consideration received by the Golden Sky stockholders in the merger and in
sales to Pegasus in advance of the merger. To satisfy the "continuity of
business enterprise" requirement, Pegasus must continue the historic business
conducted by Golden Sky or use a significant portion of the historic business
assets of Golden Sky in a business. To satisfy the "control" requirement,
Golden Sky stockholders owning at least 80% of the total voting power of all
classes of Golden Sky capital stock entitled to vote and at least 80% of the
total number of shares of all other classes of Golden Sky capital stock, must
exchange their shares of Golden Sky capital stock for shares of Class A common
stock. For purposes of the "control" requirement, the amount of stock
constituting control is measured immediately before the transaction, and
therefore, is affected by the number of shares of Golden Sky capital stock
voted against the merger by stockholders who thereafter exercise their
appraisal rights as dissenting stockholders and receive cash provided by
Pegasus.
A successful Internal Revenue Service challenge to the "reorganization"
status of the merger as a result of a failure to satisfy the "continuity of
interest," "control" or "continuity of business enterprise" requirements or
otherwise would result in a Golden Sky stockholder recognizing gain or loss
with respect to each share of Golden Sky capital stock surrendered equal to the
difference between the stockholder's basis in such share and the fair market
value, as of the effective time of the merger, of the shares of Class A common
stock received in exchange therefor. In such event, a stockholder's aggregate
basis in the shares of Class A common stock so received would equal their fair
market value and the holding period for such shares would begin the day after
the merger.
59
<PAGE>
Provided that the merger qualifies as a "reorganization," holders of
warrants and options to acquire shares of Golden Sky capital stock will not
recognize income upon the conversion of the warrants and options into warrants
and options to purchase Class A common stock.
Accounting Treatment
Upon consummation of the merger, Pegasus will account for the acquisition
of Golden Sky using the purchase method of accounting. Accordingly, the
consideration to be paid in the merger will be allocated to assets acquired and
liabilities assumed based on their estimated fair values at the effective time
of the merger. Income (or loss) of Golden Sky prior to the effective time will
not be included in income of the combined company.
Pegasus expects that as a result of the merger, Golden Sky's intangible
assets will increase by approximately $968.9 million, which will be amortized
over a ten-year period resulting in a charge to earnings of approximately $96.9
million for each of the years in the period. Additionally, Pegasus expects to
incur a one-time restructuring charge of approximately $3.0 million in
connection with the merger.
Federal Securities Law Consequences
All shares of Class A common stock received by the Golden Sky stockholders
in the merger will be freely transferable -- subject to the agreement of
certain Golden Sky stockholders, contained in the registration rights
agreement, not to sell their shares of Class A common stock before six months
after the closing of the merger. However, shares of Class A common stock
received by any person who is deemed to be an "affiliate," as such term is
defined under the Securities Act of 1933, of Golden Sky prior to the merger or
of Pegasus after the merger may be resold by them only in transactions
permitted by the resale provisions of Rule 145 under the Securities Act, or
Rule 144 in the case of a person who becomes an affiliate of Pegasus, or as
otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of Golden Sky or Pegasus generally include individuals or entities
that control, are controlled by, or are under common control with, such party
and may include certain officers and directors of such party as well as
principal stockholders of such party.
60
<PAGE>
Pegasus' Selected Historical and Pro Forma Consolidated Financial Data
The following selected consolidated financial data should be read in
conjunction with our consolidated financial statements, related notes thereto,
pro forma consolidated financial information and other financial information,
and Pegasus Management's Discussion and Analysis of Financial Condition and
Results of Operations, included elsewhere in this proxy statement/prospectus.
The consolidated statement of operating data for the fiscal years ended
December 31, 1995, 1996, 1997, 1998 and 1999 and the consolidated balance sheet
data as of December 31, 1995, 1996, 1997, 1998 and 1999 are derived from the
audited consolidated financial statements previously filed with the SEC. The
statement of operating data reflect net revenues and operating expenses from
our continuing operations. The results of operations from the entire cable
segment have been classified as discontinued and certain amounts for 1995
through 1998 have been restated. You should also read the paragraphs that
follow this table, which explain certain portions of the table.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
Statement of Operating Data: 1995 1996 1997
(Dollars in thousands, except per share
data)
Net revenues:
<S> <C> <C> <C>
DBS ......................................................... $ 1,469 $ 5,829 $ 38,254
Broadcast ................................................... 20,073 28,604 31,876
--------- -------- ---------
Total net revenues ......................................... 21,542 34,433 70,130
Operating expenses:
DBS
Programming, technical and general and administrative ...... 1,379 4,312 26,042
Marketing and selling ...................................... -- 646 5,973
Incentive compensation ..................................... 9 146 795
Depreciation and amortization .............................. 640 1,786 17,042
Broadcast
Programming, technical and general and administrative ...... 10,181 13,903 15,672
Marketing and selling ...................................... 3,789 4,851 5,704
Incentive compensation ..................................... 415 691 298
Depreciation and amortization .............................. 2,934 4,041 3,754
Corporate expenses .......................................... 1,364 1,429 2,256
Corporate depreciation and amortization ..................... 492 988 1,353
Other expense, net .......................................... 15 139 630
--------- -------- ---------
Income (loss) from operations .............................. 324 1,501 (9,389)
Interest expense ............................................. (4,135) (8,885) (14,275)
Interest income .............................................. 362 218 1,508
Other non-operating expenses ................................. -- -- --
--------- -------- ---------
Loss from continiuing operations before income taxes,
equity loss and extraordinary items ........................ (3,449) (7,166) (22,156)
Provision (benefit) for income taxes ......................... 10 (145) 168
Equity in net loss of unconsolidated affiliate ............... -- -- --
--------- -------- ---------
Loss from continuing operations before extraordinary items... (3,459) (7,021) (22,324)
Discontinued operations:
Income (loss) from discontinued operations of cable
segment, net of income taxes ............................... (4,698) (2,703) 257
Gain on sale of discontinued operations, net of income
taxes ...................................................... -- -- 4,451
--------- -------- ---------
Loss before extraordinary items ............................. (8,157) (9,724) (17,616)
Extraordinary gain (loss) from extinguishment of debt, net ... 10,211 (250) (1,656)
--------- -------- ---------
Net income (loss) ........................................... 2,054 (9,974) (19,272)
Preferred stock dividends ................................... -- -- 12,215
--------- -------- ---------
Net income (loss) applicable to common shares ............... $ 2,054 ($ 9,974) ($ 31,487)
<PAGE>
========= ======== =========
Loss per common share:
Loss from continuing operations ............................ ($ 1.13) ($ 3.50)
Income (loss) from discontinued operations ................. (0.43) 0.03
Gain on sale of discontinued operations .................... -- 0.45
-------- ---------
Loss before extraordinary items ............................ (1.56) (3.02)
Extraordinary item ......................................... (0.04) (0.17)
-------- ---------
Loss per common share ...................................... ($ 1.60) ($ 3.19)
======== =========
Weighted average shares outstanding (000's) ................ 6,240 9,858
======== =========
Other Data:
Pre-marketing cash flow from continuing operations:
DBS ......................................................... $ 90 $ 1,517 $ 12,212
Broadcast ................................................... 6,103 9,850 10,500
--------- -------- ---------
Total pre-marketing cash flow from continuing operations .... $ 6,193 $ 11,367 $ 22,712
========= ======== =========
Location cash flow from continuing operations ................ $ 6,193 $ 10,721 $ 16,739
Operating cash flow from continuing operations ............... 4,829 9,292 14,483
Capital expenditures ......................................... 2,640 6,294 9,929
Net cash provided by (used for):
Operating activities ........................................ 5,783 3,059 8,478
Investing activities ........................................ (6,047) (81,179) (142,109)
Financing activities ........................................ 10,859 74,727 169,098
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
Pro Forma
Statement of Operating Data: 1998 1999 1999
(Dollars in thousands, except per share
data)
Net revenues:
<S> <C> <C> <C>
DBS ......................................................... $ 147,142 $ 286,353 $ 426,926
Broadcast ................................................... 34,311 36,415 36,415
--------- --------- ---------
Total net revenues ......................................... 181,453 322,768 463,341
Operating expenses:
DBS
Programming, technical and general and administrative ...... 102,419 201,158 324,507
Marketing and selling ...................................... 45,706 117,774 182,707
Incentive compensation ..................................... 1,159 1,592 2,374
Depreciation and amortization .............................. 59,077 82,744 215,598
Broadcast
Programming, technical and general and administrative ...... 18,056 22,812 22,812
Marketing and selling ...................................... 5,993 6,304 6,304
Incentive compensation ..................................... 177 57 57
Depreciation and amortization .............................. 4,557 5,144 5,144
Corporate expenses .......................................... 3,614 5,975 5,975
Corporate depreciation and amortization ..................... 2,105 3,119 3,119
Other expense, net .......................................... 1,409 1,995 1,995
--------- --------- ---------
Income (loss) from operations .............................. (62,819) (125,906) (307,251)
Interest expense ............................................. (44,559) (64,904) (119,898)
Interest income .............................................. 1,586 1,356 3,749
Other non-operating expenses ................................. -- -- (1,259)
--------- --------- ---------
Loss from continiuing operations before income taxes,
equity loss and extraordinary items ........................ (105,792) (189,454) (424,659)
Provision (benefit) for income taxes ......................... (901) (8,892) (8,892)
Equity in net loss of unconsolidated affiliate ............... -- (201) (201)
--------- --------- ---------
Loss from continuing operations before extraordinary items... (104,891) (180,763) (415,968)
Discontinued operations:
Income (loss) from discontinued operations of cable
segment, net of income taxes ............................... 1,047 2,128 --
Gain on sale of discontinued operations, net of income
taxes ...................................................... 24,727 -- --
--------- --------- ---------
Loss before extraordinary items ............................. (79,117) (178,635) (415,968)
Extraordinary gain (loss) from extinguishment of debt, net ... -- (6,178) --
--------- --------- ---------
Net income (loss) ........................................... (79,117) (184,813) (415,968)
Preferred stock dividends ................................... 14,764 16,706 36,206
--------- --------- ---------
Net income (loss) applicable to common shares ............... ($ 93,881) ($ 201,519) ($ 452,174)
========= ========= =========
Loss per common share:
Loss from continuing operations ............................ ($ 8.46) ($ 10.46) ($ 17.68)
Income (loss) from discontinued operations ................. 0.07 0.11 --
Gain on sale of discontinued operations .................... 1.75 -- --
--------- --------- ---------
Loss before extraordinary items ............................ ( 6.64) ( 10.35) ( 17.68)
Extraordinary item ......................................... -- ( 0.33) --
--------- --------- ---------
Loss per common share ...................................... ($ 6.64) ($ 10.68) ($ 17.68)
========= ========= =========
Weighted average shares outstanding (000's) ................ 14,130 18,875 25,575
========= ========= =========
Other Data:
Pre-marketing cash flow from continuing operations:
DBS ......................................................... $ 44,723 $ 85,195 $ 102,419
Broadcast ................................................... 10,262 7,299 7,299
--------- --------- ---------
Total pre-marketing cash flow from continuing operations .... $ 54,985 $ 92,494 $ 109,718
========= ========= =========
Location cash flow from continuing operations ................ $ 9,279 ($ 25,280) ($ 72,989)
Operating cash flow from continuing operations ............... 5,665 (31,255) (78,964)
Capital expenditures ......................................... 12,400 14,784 12,839
Net cash provided by (used for):
Operating activities ........................................ (21,962) (88,879) NA
Investing activities ........................................ (101,373) (133,981) NA
Financing activities ........................................ 133,791 208,808 NA
</TABLE>
61
<PAGE>
Pegasus' Selected Historical and Pro Forma Consolidated Financial Data
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------------
Pro Forma
1995 1996 1997 1998 1999 1999
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ......................... $21,856 $ 8,582 $ 45,269 $ 75,985 $ 42,832 $ 574,020
Working capital (deficiency) ...................... 17,566 6,430 32,347 37,889 (4,936) 496,137
Total assets ...................................... 95,770 173,680 380,862 886,310 945,332 2,742,170
Total debt (including current) .................... 82,896 115,575 208,355 559,029 684,414 1,124,592
Total liabilities ................................. 95,521 133,354 239,234 699,144 862,725 1,684,463
Redeemable preferred stock ........................ -- -- 111,264 126,028 142,734 142,734
Convertible preferred stock ....................... -- -- -- -- -- 290,525
Minority interest ................................. -- -- 3,000 3,000 3,000 3,936
Total common stockholders' equity (deficit) ....... 249 40,326 27,364 58,138 (63,127) 620,512
</TABLE>
The pro forma income statement and other data for the year ended December
31, 1999 include our pending cable sale, the closing of the new Pegasus Media &
Communications credit facility, the convertible preferred stock offering and
the merger with Golden Sky as if they had all occurred at the beginning of
1999. The pro forma balance sheet data as of December 31, 1999 includes the
pending cable sale, the investment in Personalized Media, the closing of the
new Pegasus Media & Communications credit facility, the convertible preferred
stock offering and the merger with Golden Sky as if such events had occurred on
such date.
The pro forma income statement data for the year ended December 31, 1999
do not include the $89.4 million gain from the pending sale of our Puerto Rico
cable system or the $15.2 million extraordinary net loss from the
extinguishment of debt.
In this section we use the terms pre-marketing cash flow from continuing
operations and location cash flow from continuing operations. Pre-marketing
cash flow from continuing operations is calculated by taking our earnings and
adding back the following expenses:
o interest and income taxes;
o depreciation and amortization and corporate overhead;
o extraordinary and non-recurring items;
o non-cash charges, such as incentive compensation under our restricted
stock plan and 401(k) plans;
o results of discontinued operations; and
o direct broadcast satellite subscriber acquisition costs, which are sales
and marketing expenses incurred to acquire new direct broadcast satellite
subscribers.
Location cash flow from continuing operations is pre-marketing cash flow
from continuing operations less direct broadcast satellite subscriber
acquisition costs.
Pre-marketing cash flow from continuing operations and location cash flow
from continuing operations are not, and should not be considered, alternatives
to income from operations, net income, net cash provided by operating
activities or any other measure for determining our operating performance or
liquidity, as determined under U.S. generally accepted accounting principles.
Pre-marketing cash flow from continuing operations and location cash flow from
continuing operations also do not necessarily indicate whether our cash flow
will be sufficient to fund working capital, capital expenditures, or to react
to changes in Pegasus' industry or the economy generally. We believe that
pre-marketing cash flow from continuing operations and location cash flow from
continuing operations are important, however, for the following reasons:
o people who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors use to monitor our
financial performance and debt leverage.
62
<PAGE>
GOLDEN SKY'S SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table presents Golden Sky's financial and operating
information for the periods indicated. The historical financial information
presented below was taken from Golden Sky's audited consolidated financial
statements. Household and subscriber data presented below reflect 100% of the
households and subscribers comprising Golden Sky's rural DIRECTV markets,
including one rural DIRECTV market in which Golden Sky acquired less than 100%
ownership. In that market, Golden Sky acquired approximately 76% ownership.
Golden Sky receives 100% of the revenue generated by all subscribers in Golden
Sky's rural DIRECTV markets.
The following should be read in conjunction with Golden Sky's consolidated
financial statements and the notes to those financial statements and other
financial information, and Golden Sky Management's Discussion and Analysis of
Financial Condition and Results of Operations, appearing elsewhere herein.
<TABLE>
<CAPTION>
Inception
Through Years Ended December 31,
December 31, ----------------------------------------------
1996 1997 1998 1999
-------------- ------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Statement of Operations Data
Revenue:
DBS services ..................................... $ 219 $ 16,452 $ 74,910 $ 139,933
Lease and other .................................. 36 944 1,014 640
-------- ---------- ---------- ----------
Total revenue ..................................... 255 17,396 75,924 140,573
Costs and Expenses:
Costs of DBS services ............................ 130 9,304 45,291 88,690
System operations ................................ 26 3,796 11,021 19,733
Sales and marketing .............................. 73 7,316 32,201 64,933
General and administrative ....................... 1,035 2,331 7,431 15,708
Depreciation and amortization .................... 97 7,300 23,166 35,963
-------- ---------- ---------- ----------
Total costs and expenses .......................... 1,361 30,047 119,110 225,027
-------- ---------- ---------- ----------
Operating loss .................................... (1,106) (12,651) (43,186) (84,454)
Net interest expense .............................. (61) (3,206) (18,965) (42,619)
Other non-operating expenses ...................... -- -- -- (1,259)
-------- ---------- ---------- ----------
Loss before extraordinary charge .................. (1,167) (15,857) (62,151) (128,332)
Extraordinary charge on early
retirement of debt ............................... -- -- (2,577) (2,935)
-------- ---------- ---------- ----------
Net loss .......................................... (1,167) (15,857) (64,728) (131,267)
Preferred stock dividend requirements ............. -- (7,888) (14,855) (17,920)
-------- ---------- ---------- ----------
Net loss attributable to common stock-
holders ........................................ $ (1,167) $ (23,745) $ (79,583) $ (149,187)
======== ========== ========== ==========
Other Financial Data
EBITDA ............................................ $ (1,009) $ (5,351) $ (20,020) $ (48,337)
Net cash used in operating activities ............. (790) (3,111) (36,589) (61,101)
Net cash used in investing activities ............. (3,231) (120,729) (159,921) (12,232)
Net cash provided by financing activities ......... 4,500 136,997 187,362 72,115
Capital expenditures .............................. 105 998 3,317 3,452
Aggregate purchase price of acquisitions .......... 5,256 129,725 124,844 35,339
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Inception
Through Years Ended December 31,
December 31, ------------------------------------------------
1996 1997 1998 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Operating Data
Households at end of period ............ 22,000 1,135,000 1,727,000 1,861,000
Subscribers acquired in
acquisitions .......................... 3,000 65,300 54,900 18,300
Subscribers added in existing rural
DIRECTV markets ....................... 100 21,500 77,200 104,900
Subscribers at end of period ........... 3,100 89,900 222,000 345,200
SAC per gross subscriber added ......... $ 290 $ 280 $ 320 $ 380
Penetration at end of period ........... 14.1% 7.9% 12.9% 18.5%
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1996 1997 1998 1999
----------- ----------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data
Cash and cash equivalents .............. $ 479 $ 13,636 $ 4,488 $ 3,270
Restricted cash:
Current ............................... -- -- 28,083 23,731
Long-term ............................. -- -- 23,534 --
Working capital (deficit) .............. (1,948) 3,843 15,244 (2,586)
Total assets ........................... 6,383 156,240 328,099 299,337
Total debt ............................. 4,450 69,113 278,204 369,378
Stockholders' equity (deficit) ......... (1,166) (24,912) (104,470) (253,503)
</TABLE>
Restricted cash represents the amount Golden Sky placed in escrow to fund
the first four scheduled interest payments on Golden Sky Systems' 12 3/8%
senior subordinated notes due 2006. It also includes $5.3 million as of
December 31, 1998 that was deposited with the administrative agent under Golden
Sky Systems' credit facility to fund a contingent reduction of availability
under the term loan facility. This contingent reduction did not occur as a
result of an amendment to Golden Sky Systems' credit facility.
EBITDA represents earnings before interest, taxes, depreciation and
amortization, non-cash charges, extraordinary items and non-recurring charges.
EBITDA is not a measure of performance under generally accepted accounting
principles and should not be construed as a substitute for consolidated net
income or loss as a measure of performance, or as a substitute for cash flow as
a measure of liquidity. Nevertheless, Golden Sky believes that EBITDA is a
commonly recognized measure of performance in the communications industry and
is the basis for many of Golden Sky's financial covenants. As a result,
investors may use this data to analyze and compare other communications
companies with Golden Sky in terms of operating performance, leverage and
liquidity. Further, Golden Sky believes that EBITDA provides useful information
regarding an entity's ability to incur and service debt. Changes in Golden
Sky's EBITDA may indicate changes in its free cash flows available to incur and
service debt and cover fixed charges. However, EBITDA is not intended to
represent cash flows for the period and should not be considered in isolation
or as a substitute for measures of performance determined in accordance with
generally accepted accounting principles. EBITDA, as Golden Sky calculates it,
is not necessarily comparable to similarly captioned amounts of other
companies.
Subscriber acquisition costs represent subscriber acquisition costs on a
per gross new subscriber activation basis. This excludes acquired subscribers
and does not net out disconnected subscribers.
64
<PAGE>
PEGASUS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Pegasus should be read in conjunction with the consolidated
financial statements and related notes which are included elsewhere in this
proxy statement/prospectus.
GENERAL
Pegasus Communications Corporation is:
o The largest independent provider of DIRECTV with 727,000 subscribers at
January 31, 2000, on an actual basis. We have the exclusive right to
distribute DIRECTV digital broadcast satellite services to 5.0 million
rural households in 36 states. We distribute DIRECTV through the Pegasus
retail network, a network in excess of 2,500 independent retailers.
o The owner or programmer of ten TV stations affiliated with either Fox,
UPN or the WB and the owner of a large cable system in Puerto Rico serving
approximately 55,000 subscribers.
o We have increased our revenues at a compound growth rate of 89% per annum
since our inception in 1991.
DBS revenues are principally derived from monthly customer subscriptions
and pay-per-view services. Broadcast revenues are derived from the sale of
broadcast airtime to local and national advertisers.
In January 2000, we entered into a letter of intent to sell the assets of
our entire cable system business in Puerto Rico to a subsidiary of Centennial
Cellular Corporation for $170.0 million in cash, subject to certain
adjustments. The closing of this sale is anticipated to occur during the third
quarter of 2000 and is subject to the negotiation of a definitive agreement,
third-party approvals, including regulatory approvals, and other customary
conditions. The sale is also subject to approval by Pegasus' board of
directors. Accordingly, the results of our cable segment have been presented as
discontinued operations in our consolidated statements of operations.
In this section we use the terms pre-marketing cash flow from continuing
operations and location cash flow from continuing operations. Pre-marketing
cash flow from continuing operations is calculated by taking our earnings and
adding back the following expenses:
o interest;
o income taxes;
o depreciation and amortization;
o non-cash charges;
o corporate overhead;
o extraordinary and non-recurring items;
o results of discontinued operations; and
o DBS subscriber acquisition costs, which are sales and marketing expenses
incurred to acquire new DBS subscribers.
Location cash flow from continuing operations is pre-marketing cash flow
from continuing operations less DBS subscriber acquisition costs.
Pre-marketing cash flow from continuing operations and location cash flow
from continuing operations are not, and should not be considered, alternatives
to income from operations, net income, net cash provided by operating
activities or any other measure for determining our operating performance or
liquidity, as determined under generally accepted accounting principles.
Pre-marketing cash flow from continuing operations and location cash flow from
continuing operations also do not necessarily indicate whether our cash
65
<PAGE>
flow will be sufficient to fund working capital, capital expenditures, or to
react to changes in Pegasus' industry or the economy generally. We believe that
pre-marketing cash flow from continuing operations and location cash flow from
continuing operations are important, however, for the following reasons:
o people who follow our industry frequently use them as measures of
financial performance and ability to pay debt service; and
o they are measures that we, our lenders and investors use to monitor our
financial performance and debt leverage.
Pegasus generally does not require new DBS customers to sign programming
contracts and, as a result, subscriber acquisition costs are currently being
charged to operations in the period incurred.
RESULTS OF OPERATIONS
Year ended December 31, 1999 compared to the year ended December 31, 1998
Total net revenues from continuing operations in 1999 were $322.8 million,
an increase of $141.3 million, or 78%, compared to total net revenues of $181.5
million in 1998. The increase in total net revenues in 1999 was primarily due
to an increase in DBS revenues of $139.2 million attributable to acquisitions
and to internal growth in Pegasus' DBS subscriber base. Total operating
expenses from continuing operations in 1999 were $448.7 million, an increase of
$204.4 million, or 84%, compared to total operating expenses of $244.3 million
in 1998. The increase was primarily due to an increase of $194.9 million in
operating expenses attributable to the growth in Pegasus' DBS business.
Total corporate expenses from continuing operations, including corporate
depreciation and amortization, were $9.1 million in 1999, an increase of $3.4
million, or 59%, compared to $5.7 million in 1998. The increase in corporate
expenses is primarily attributable to the growth in Pegasus' business. The
increase in corporate depreciation and amortization is primarily due to
amortization of deferred financing costs associated with the issuance of $100.0
million of senior notes in November 1998.
Other expenses from continuing operations were $2.0 million in 1999, an
increase of $586,000, or 42%, compared to other expenses of $1.4 million in
1998. The increase is primarily due to increased investor relations activities,
board related costs and development costs.
Interest expense from continuing operations was $64.9 million in 1999, an
increase of $20.3 million, or 46%, compared to interest expense of $44.6
million in 1998. The increase in interest expense is primarily due to interest
on Pegasus' $100.0 million senior notes issued in November 1998 and an increase
in bank borrowings and seller notes associated with Pegasus' DBS acquisitions.
Interest income from continuing operations was $1.4 million in 1999, a decrease
of $229,000, or 14%, compared to interest income of $1.6 million in 1998. The
decrease in interest income is due to lower average cash balances in 1999
compared to 1998.
The benefit for income taxes from continuing operations amounted to $8.9
million in 1999, an increase of $8.0 million, compared to a benefit of $901,000
in 1998. The increase is primarily attributable to the amortization of the
deferred tax liability that originated from the acquisition of Digital
Television Services, Inc. in April 1998.
Equity in the net loss of an unconsolidated affiliate, resulting from an
investment in Pegasus PCS Partners, LP in August 1999, amounted to $201,000 for
the year ended December 31, 1999.
Income from discontinued operations of the cable segment, net of income
taxes, was $2.1 million in 1999, an increase of $1.1 million, or 103%, compared
to $1.0 million in 1998. The increase is primarily attributable to the
acquisition of the Aguadilla, Puerto Rico cable system effective March 31,
1999. Pegasus had approximately 55,000 cable subscribers at December 31, 1999
compared to 28,800 at December 31, 1998.
Pegasus sold its remaining New England cable systems in 1998 for $30.1
million resulting in a gain on the sale of discontinued operations, net of
income taxes, of $24.7 million.
66
<PAGE>
Extraordinary loss from the extinguishment of debt was $6.2 million in
1999. In November 1999, Pegasus exchanged $155.0 million in principal amount of
its' senior notes due 2007 for $155.0 million in principal amount of
outstanding senior subordinated notes due 2007 of its subsidiaries, Digital
Television Services, Inc. and DTS Capital, Inc. Accordingly, the deferred
financing costs related to the senior subordinated notes due 2007 of its
subsidiaries were written off. No such refinancings occurred in 1998.
Preferred stock dividends were $16.7 million in 1999, an increase of $1.9
million, or 13%, compared to $14.8 million in preferred stock dividends in
1998. The increase is attributable to a greater number of shares of Pegasus'
preferred stock outstanding in 1999 compared to 1998 as the result of payment
of dividends in kind.
DBS
During 1999, Pegasus acquired, through acquisitions, approximately 39,000
subscribers and the exclusive DIRECTV distribution rights to approximately
336,000 households in rural areas of the United States. At December 31, 1999,
Pegasus had exclusive DIRECTV distribution rights to 4.9 million households and
702,000 subscribers as compared to 4.6 million households and 435,000
subscribers at December 31, 1998. Pegasus had 7.2 million households and 1.1
million subscribers at December 31, 1999, including pending acquisitions (which
include the merger with Golden Sky). At December 31, 1998, subscribers would
have been 733,000, including pending and completed acquisitions. Subscriber
penetration increased from 10.3% at December 31, 1998 to 15.3% at December 31,
1999, including pending and completed acquisitions.
Total DBS net revenues were $286.4 million in 1999, an increase of $139.2
million, or 95%, compared to DBS net revenues of $147.1 million in 1998. The
increase is primarily due to an increase in the average number of subscribers
in 1999 compared to 1998. The average monthly revenue per subscriber was $43.94
in 1999 compared to $41.63 in 1998. Pro forma DBS net revenues, including
pending acquisitions at December 31, 1999 (which include the merger with Golden
Sky), were $434.8 million, an increase of $134.3 million, or 45%, compared to
pro forma DBS net revenues of $300.5 million in 1998.
Programming, technical, and general and administrative expenses were
$201.2 million in 1999, an increase of $98.7 million, or 96%, compared to
$102.4 million in 1998. The increase is attributable to significant growth in
subscribers and territory in 1999. As a percentage of revenue, programming,
technical, and general and administrative expenses were 70.2% in 1999 compared
to 69.6% in 1998.
Subscriber acquisition costs were $117.8 million, an increase of $72.1
million compared to $45.7 million in 1998. Gross subscriber additions were
337,300 in 1999 compared to 132,700 in 1998. The total subscriber acquisition
costs per gross subscriber addition were $349 in 1999 compared to $344 in 1998.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $1.6 million in 1999, an increase of $433,000, or
37%, compared to $1.2 million in 1998. The increase resulted from a larger gain
in pro forma location cash flow during 1999 as compared to 1998.
Depreciation and amortization was $82.7 million in 1999, an increase of
$23.7 million, or 40%, compared to $59.1 million in 1998. The increase in
depreciation and amortization is primarily due to an increase in the fixed and
intangible asset base as the result of DBS acquisitions that occurred in 1998
and 1999.
Broadcast
In 1999, Pegasus owned or programmed ten broadcast television stations in
six markets. Two new stations were launched during the second half of 1998 and
one new station was launched in December 1999. Total net broadcast revenues in
1999 were $36.4 million, an increase of $2.1 million, or 6%, compared to net
broadcast revenues of $34.3 million in 1998. The increase was primarily
attributable to an increase of $1.6 million in net broadcast revenues from the
four stations that began operations in 1997 and 1998.
67
<PAGE>
Programming, technical, and general and administrative expenses were $22.8
million in 1999, an increase of $4.8 million, or 26%, compared to $18.1 million
in 1998. The increase is primarily due to higher programming costs in 1999 and
an increase in news related expenses associated with the launch of
self-produced news in our Portland, Maine and Chattanooga, Tennessee markets.
Marketing and selling expenses were $6.3 million in 1999, an increase of
$311,000, or 5%, compared to $6.0 million in 1998. The increase in marketing
and selling expenses was due to an increase in promotional costs associated
with the launch of the new stations and news programs.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $57,000 in 1999, a decrease of $120,000, or 68%,
compared to $177,000 in 1998. The decrease resulted from a lower gain in pro
forma location cash flow during 1999 as compared to 1998.
Depreciation and amortization was $5.1 million in 1999, an increase of
$587,000, or 13%, compared to $4.6 million in 1998. The increase is due to
capital expenditures associated with the launch of the new stations and our
news initiative.
Year ended December 31, 1998 compared to the year ended December 31, 1997
Total net revenues from continuing operations in 1998 were $181.5 million,
an increase of $111.3 million, or 159%, compared to total net revenues of $70.1
million in 1997. The increase in total net revenues in 1998 was primarily due
to an increase in DBS revenues of $108.9 million attributable to acquisitions
and to internal growth in Pegasus' DBS subscriber base. Total operating
expenses from continuing operations in 1998 were $244.3 million, an increase of
$164.8 million, or 207%, compared to total operating expenses of $79.5 million
in 1997. The increase was primarily due to an increase of $158.5 million in
operating expenses attributable to the growth in Pegasus' DBS business.
Total corporate expenses from continuing operations, including corporate
depreciation and amortization, were $5.7 million in 1998, an increase of $2.1
million, or 58%, compared to $3.6 million in 1997. The increase in corporate
expenses is primarily attributable to the growth in Pegasus' business. The
increase in corporate depreciation and amortization is due to amortization of
deferred financing costs associated with the issuance of $100.0 million of
preferred stock in January 1997, $115.0 million of senior notes in October 1997
and $100.0 million of senior notes in November 1998.
Other expenses from continuing operations were $1.4 million in 1998, an
increase of $779,000, or 124%, compared to other expenses of $630,000 in 1997.
The increase is primarily due to increased investor relations activities and
other board related costs.
Interest expense from continuing operations was $44.6 million in 1998, an
increase of $30.3 million, or 212%, compared to interest expense of $14.3
million in 1997. The increase in interest expense is primarily due to a full
year's interest on Pegasus' $115.0 million senior notes and an increase in bank
borrowings and seller notes associated with Pegasus' DBS acquisitions. Interest
income from continuing operations was $1.6 million in 1998, an increase of
$77,000, or 5%, compared to interest income of $1.5 million in 1997. The
increase in interest income is due to greater average cash balances in 1998
compared to 1997.
The provision for income taxes from continuing operations declined by
approximately $1.1 million primarily as a result of the amortization of the
deferred tax liability that originated from the acquisition of Digital
Television Services, Inc.
Income from discontinued operations of the cable segment, net of income
taxes, was $1.0 million in 1998, an increase of $791,000, or 308%, compared to
$257,000 in 1997. The increase is primarily attributable to a decrease in
interest expense in 1998 compared to 1997 as a result of the sale of Pegasus'
existing New England cable systems effective July 1, 1998. In September 1998,
Hurricane Georges swept through Puerto Rico damaging Pegasus' cable system.
Prior to the hurricane, Pegasus had approximately 29,000 subscribers. At
December 31, 1998, Pegasus had approximately 28,800 subscribers compared to
27,300 subscribers in 1997.
The gain on sale of discontinued operations, net of income taxes, was
$24.7 million in 1998 compared to $4.5 million in 1997. In 1997, Pegasus sold
its New Hampshire cable system for $6.9 million resulting in a gain of $4.5
million. In 1998, Pegasus sold its remaining New England cable systems for
$30.1 million resulting in a gain of $24.7 million.
68
<PAGE>
Extraordinary loss from the extinguishment of debt decreased $1.7 million
in 1998. In 1997, Pegasus refinanced its existing $130.0 million credit
facility with a new $180.0 million credit facility and accordingly, the
deferred financing costs associated with the $130.0 million credit facility
were written off. No such refinancings occurred in 1998.
Preferred stock dividends were $14.8 million in 1998, an increase of $2.6
million, or 21%, compared to $12.2 million in preferred stock dividends in
1997. The increase is attributable to a greater number of shares of Pegasus'
preferred stock outstanding in 1998 compared to 1997 as the result of payment
of dividends in preferred stock and to the preferred stock being outstanding
for a full year.
DBS
Pegasus' DBS business experienced significant growth in 1998. During 1998,
Pegasus acquired approximately 217,000 subscribers and the exclusive DIRECTV
distribution rights to approximately 2.4 million households in rural areas of
the United States. At December 31, 1998, Pegasus had exclusive DIRECTV
distribution rights to 4.6 million households and 435,000 subscribers as
compared to 2.2 million households and 132,000 subscribers at December 31,
1997. Subscriber penetration increased from 6.7% at December 31, 1997 to 10.3%
at December 31, 1998, including pending and completed acquisitions.
Total DBS net revenues were $147.1 million in 1998, an increase of $109.0
million, or 285%, compared to DBS net revenues of $38.3 million in 1997. The
increase is primarily due to an increase in the average number of subscribers
in 1998 compared to 1997. Pegasus' 1998 DBS acquisitions represented $70.4
million, or 65%, of the $109.0 million increase in DBS net revenues. The
average monthly revenue per subscriber was $41.63 in 1998 compared to $40.72 in
1997.
Programming, technical, and general and administrative expenses were
$102.4 million in 1998, an increase of $76.4 million, or 293%, compared to
$26.0 million in 1997. The increase is attributable to significant growth in
subscribers and territory in 1998. Pegasus' 1998 DBS acquisitions represented
$45.7 million, or 60%, of the $76.4 million increase in programming, technical,
and general and administrative expenses. As a percentage of revenue,
programming, technical, and general and administrative expenses were 69.6% in
1998 compared to 68.1% in 1997.
Subscriber acquisition costs were $45.7 million, an increase of $35.2
million compared to $10.5 million in 1997. In 1997, $4.5 million in subscriber
acquisition costs were capitalized as a significant number of subscribers
entered into extended programming contracts. Pegasus generally did not require
new subscribers to sign programming contracts in 1998. The total subscriber
acquisition costs per gross subscriber addition were $344 in 1998 compared to
$281 in 1997. The increase is attributable to increases in sales commissions
paid to Pegasus' dealers, promotional programming and advertising.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $1.2 million in 1998, an increase of $364,000, or
46%, compared to $795,000 in 1997. The increase resulted from a larger gain in
pro forma location cash flow during 1998 as compared to 1997.
Depreciation and amortization was $59.1 million in 1998, an increase of
$42.0 million, or 247%, compared to $17.0 million in 1997. The increase in
depreciation and amortization is primarily due to an increase in the fixed and
intangible asset base as the result of DBS acquisitions that occurred in 1997
and 1998.
Broadcast
In 1998, Pegasus owned or programmed nine broadcast television stations in
six markets. Two new stations were launched during the second half of 1998.
Total net broadcast revenues in 1998 were $34.3 million, an increase of $2.4
million, or 8%, compared to net broadcast revenues of $31.9 million in 1997.
The increase was primarily attributable to an increase of $1.3 million in net
broadcast revenues from stations that began operations in 1997 and a $558,000
increase in barter revenue. Net broadcast revenues from the two stations
launched in 1998 were minimal.
Programming, technical, and general and administrative expenses were $18.1
million in 1998, an increase of $2.4 million, or 15%, compared to $15.7 million
in 1997. The increase is primarily due to a full year's expenses from the two
stations launched in 1997 and higher programming costs in 1998.
69
<PAGE>
Marketing and selling expenses were $6.0 million in 1998, an increase of
$289,000, or 5%, compared to $5.7 million in 1997. The increase in marketing
and selling expenses was due to an increase in promotional costs associated
with the launch of the new stations and news programs.
Incentive compensation, which is calculated based on increases in pro
forma location cash flow, was $177,000 in 1998, a decrease of $120,000, or 40%,
compared to $298,000 in 1997. The decrease resulted from a lower gain in pro
forma location cash flow during 1998 as compared to 1997.
Depreciation and amortization was $4.6 million in 1998, an increase of
$802,000, or 21%, compared to $3.8 million in 1997. The increase in
depreciation and amortization is due to an increase in fixed assets associated
with the construction of the new stations in 1997 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
Pegasus' primary sources of liquidity have been the net cash provided by
its DBS, broadcast and cable operations, credit available under its credit
facilities and proceeds from public and private offerings. Pegasus' principal
uses of its cash has been to fund acquisitions, to meet debt service
obligations, to fund DBS subscriber acquisition costs, to fund DBS programming
costs and dealer commissions and to fund investments in its broadcast and cable
technical facilities.
Pre-marketing cash flow from continuing operations increased by
approximately $37.5 million, or 68%, for the year ended December 31, 1999 as
compared to the same period in 1998. Pre-marketing cash flow from continuing
operations increased as a result of:
o a $40.5 million, or 90%, increase in DBS pre-marketing cash flow of which
$13.3 million, or 33%, was due to an increase in same territory
pre-marketing cash flow and $27.2 million or 67% was attributable to
territories acquired in 1998 and 1999; and
o a $3.0 million, or 29%, decrease in broadcast location cash flow as the
result of a $2.6 million, or 25%, decrease in same station location cash
flow and a $406,000 decrease attributable to the three new stations
launched in July 1998, November 1998 and December 1999.
During the year ended December 31, 1999, $54.5 million of cash on hand at
the beginning of the year, together with $208.8 million of net cash provided by
Pegasus' financing activities, was used to fund operating activities of
approximately $88.9 million and other investing activities of $134.0 million.
Investing activities consisted of:
o the purchase of a cable system serving Aguadilla, Puerto Rico and
neighboring communities for approximately $42.1 million;
o the acquisition of DBS assets from fifteen independent DIRECTV providers
during 1999 for approximately $64.6 million;
o the purchase of a building for broadcast operations in our Northeastern
Pennsylvania market for approximately $1.8 million;
o broadcast expenditures associated with the launch of self-produced news
in our Portland, Maine and Chattanooga, Tennessee markets totaling
approximately $1.0 million;
o broadcast expenditures in connection with our new station in Jackson,
Mississippi and other construction costs for $708,000;
o DBS facility upgrades of approximately $4.5 million;
o the expansion, enhancements and capitalized costs of the Puerto Rico
cable system amounting to approximately $6.1 million, including $213,000
related to hurricane damage;
o payments of programming rights amounting to $3.5 million;
o proceeds from the sale of DBS assets to an independent DIRECTV provider
of $509,000;
70
<PAGE>
o new business development costs of $373,000;
o investment in affiliate of $4.8 million; and
o other capital expenditures and intangibles totaling $5.0 million.
Financing activities consisted of:
o the issuance of approximately 3.8 million shares of Class A common
stock resulting in net proceeds to Pegasus of approximately $77.7
million;
o net borrowings on bank credit facilities totaling $130.3 million;
o the repayment of approximately $14.5 million of long-term debt,
primarily sellers' notes and capital leases;
o net restricted cash draws of approximately $18.1 million for interest
payments and $1.0 million in connection with the acquisition of the
Aguadilla, Puerto Rico cable system;
o capitalized costs relating to Pegasus' financings of approximately
$3.6 million; and
o the repurchase of Class A common stock in treasury of $187,000.
As of December 31, 1999, cash on hand amounted to $40.5 million plus
restricted cash of $2.4 million.
Pre-marketing cash flow from continuing operations increased by
approximately $32.3 million, or 142%, for the year ended December 31, 1998 as
compared to the same period in 1997. Pre-marketing cash flow from continuing
operations increased as a result of:
o a $32.5 million, or 266%, increase in DBS pre-marketing cash flow of
which $3.8 million, or 12%, was due to an increase in same territory
pre-marketing cash flow and $28.7 million or 88% was attributable to
territories acquired in 1997 and 1998; and
o a $238,000, or 2%, decrease in broadcast location cash flow as the
result of a $110,000, or 1%, decrease in same station location cash
flow and a $128,000 decrease attributable to the four new stations
launched in August 1997, October 1997, July 1998 and November 1998.
During the year ended December 31, 1998, proceeds from the sale of
Pegasus' remaining New England cable systems amounted to $30.1 million, which
together with $44.0 million of cash on hand at the beginning of the year, $3.3
million of cash acquired from acquisitions and $133.8 million of net cash
provided by Pegasus' financing activities, was used to fund operating
activities of approximately $22.0 million and other investing activities of
$134.8 million. Investing activities, net of cash acquired from acquisitions
and proceeds from the sale of the New England cable systems, consisted of:
o the acquisition of DBS assets, excluding Digital Television Services,
Inc., from twenty-six independent DIRECTV providers during 1998 for
approximately $109.3 million;
o approximately $6.8 million of broadcast expenditures for broadcast
television transmitter, tower and facility constructions and upgrades.
Pegasus commenced the programming of four new broadcast stations over
the last two years, WPME in August 1997, WGFL in October 1997, WFXU in
July 1998 and WSWB in November 1998;
o DBS facility upgrades of approximately $1.2 million;
o the expansion and enhancements of the Puerto Rico cable system
amounting to approximately $2.0 million;
o payments of programming rights amounting to $2.6 million;
o capitalized costs relating to Pegasus' financing of approximately $4.4
million;
o capitalized costs relating to the acquisition of Digital Television
Services, Inc. of approximately $4.3 million; and
o maintenance and other capital expenditures and intangibles totaling
approximately $4.2 million.
71
<PAGE>
Financing activities consisted of:
o the $100.0 million 9 3/4% senior notes offering resulting in proceeds
to Pegasus of approximately $96.8 million;
o net borrowings on bank credit facilities totaling $44.4 million;
o the repayment of approximately $15.0 million of long-term debt,
primarily sellers' notes and capital leases; and
o net restricted cash draws of approximately $7.5 million for interest
payments.
As of December 31, 1998, cash on hand amounted to $54.5 million plus
restricted cash of $21.5 million. Pegasus had $27.5 million drawn and standby
letters of credit amounting to $49.6 million under the $180.0 million Pegasus
Media & Communications credit facility. Additionally, there was $46.4 million
drawn and standby letters of credit of $18.5 million outstanding under the
$90.0 million Digital Television Services credit facility.
During the year ended December 31, 1997, net cash provided by operating
activities was approximately $8.5 million. This amount, together with $8.6
million of cash on hand, $6.9 million of net proceeds from the sale of the New
Hampshire cable system and $169.1 million of net cash provided by Pegasus'
financing activities was used to fund other investing activities totaling
$149.1 million. Financing activities consisted of:
o raising $95.8 million in net proceeds from Pegasus' preferred stock
offering in January 1997 and $111.0 million in net proceeds from
Pegasus' offering of senior notes in October 1997;
o borrowing $94.2 million under a former bank credit facility;
o repayment of all $94.2 million of that indebtedness and $29.6 million
of indebtedness under a still earlier credit facility;
o net repayment of approximately $657,000 of other long-term debt;
o designating $1.2 million as restricted cash to collateralize a letter
of credit; and
o the incurrence of approximately $6.2 million in debt issuance costs
associated with various credit facilities.
Investing activities, net of the proceeds from the sale of the New
Hampshire cable system, consisted of:
o the acquisition of DBS assets from twenty-five independent DIRECTV
providers during 1997, for approximately $133.9 million;
o broadcast television transmitter, tower and facility constructions and
upgrades totaling approximately $5.8 million;
o the interconnection and expansion of the Puerto Rico cable systems
amounting to approximately $1.8 million;
o payments of programming rights amounting to $2.6 million; and
o maintenance and other capital expenditures and intangibles totaling
approximately $5.4 million.
As defined in the certificate of designation governing Pegasus' Series A
preferred stock and the indentures governing Pegasus' senior notes, Pegasus is
required to provide adjusted operating cash flow data for Pegasus and its
restricted subsidiaries on a consolidated basis where adjusted operating cash
flow is defined as "for the four most recent fiscal quarters for which internal
financial statements are available, operating cash flow of such person and its
restricted subsidiaries less DBS cash flow for the most recent four-quarter
period plus DBS cash flow for the most recent quarterly period, multiplied by
four." Operating cash flow is income from operations before income taxes,
depreciation and amortization, interest expense, extraordinary items and
non-cash charges. Although adjusted operating cash flow is not a measure of
performance under generally accepted accounting principles, we believe that
location cash flow, operating cash flow and adjusted operating cash flow are
accepted within our business segments as generally recognized
72
<PAGE>
measures of performance and are used by analysts who report publicly on the
performance of companies operating in such segments. Restricted subsidiaries
carries the same meaning as in the certificate of designation. Digital
Television Services, Inc., among certain other of Pegasus' subsidiaries, are
not included in the definition of restricted subsidiaries and, accordingly,
their operating results are not included in the adjusted operating cash flow
data provided below. Pro forma for the acquisition of the Aguadilla, Puerto
Rico cable system, the three completed DBS acquisitions occurring in the fourth
quarter of 1999 and the sale of our New England cable systems, as if such
acquisitions/disposition occurred on January 1, 1999, adjusted operating cash
flow would have been approximately $75.1 million as follows:
<TABLE>
<CAPTION>
Four Quarters Ended
December 31,1999
(in thousands) --------------------
<S> <C>
Revenues ................................................................................. $244,645
Direct operating expenses, excluding depreciation, amortization and other non-cash
charges................................................................................. 164,997
Income from operations before incentive compensation, corporate expenses, depreciation and
amortization and other non-cash charges ................................................. 79,628
Corporate expenses ....................................................................... 4,569
--------
Adjusted operating cash flow ............................................................. $ 75,059
========
</TABLE>
Financings
In 1999, Pegasus Media & Communications maintained a $180.0 million
senior, reducing revolving credit facility. Borrowings under the credit
facility were available for acquisitions, subject to the approval of the
lenders in certain circumstances, working capital, capital expenditures and for
general corporate purposes. As of December 31, 1999, $142.5 million was
outstanding under its $180.0 million credit facility. The credit facility was
amended and restated in January 2000.
In 1999, Digital Television Services maintained a $70.0 million senior,
reducing revolving credit facility and a $20.0 million senior term credit
facility. Borrowings under the credit facilities were available to refinance
certain indebtedness and for acquisitions, subject to the approval of the
lenders in certain circumstances, working capital, capital expenditures and for
general corporate purposes. As of December 31, 1999, $61.7 million was
outstanding and standby letters of credit amounting to $10.4 million were
issued under its $90.0 million credit facilities, including $2.6 million
collateralizing certain of Pegasus' sellers' notes. The credit facilities were
refinanced in January 2000 with the first amended and restated Pegasus Media &
Communications credit facility.
In March 1999, Pegasus completed its secondary public offering in which it
sold approximately 3.6 million shares of its Class A common stock to the public
at a price of $22.00 per share, resulting in net proceeds to Pegasus of
approximately $74.9 million. Pegasus applied $49.9 million of the net proceeds
to pay down indebtedness under the Pegasus Media & Communications credit
facility and $25.0 million towards the acquisition of the cable system serving
Aguadilla, Puerto Rico and neighboring communities.
In December 1999, Pegasus entered into a $35.5 million interim letter of
credit facility. As of December 31, 1999, $35.5 million of standby letters of
credit were issued under the credit facility, including $19.5 million
collateralizing certain of Pegasus' outstanding sellers' notes.
In January 2000, Pegasus Media & Communications entered into a first
amended and restated credit facility, which consists of a $225.0 million senior
revolving credit facility which expires in 2004 and a $275.0 million senior
term credit facility which expires in 2005. This new credit facility amends
Pegasus Media & Communications' existing $180.0 million senior, reducing
revolving credit facility. The new credit facility is collateralized by
substantially all of the assets of Pegasus Media & Communications and its
subsidiaries and is subject to certain financial covenants as defined in the
loan agreement, including a debt to adjusted cash flow covenant. Borrowings
under the new Pegasus Media & Communications credit facility can be used for
acquisitions and general corporate purposes.
Commensurate with the closing of the new Pegasus Media & Communications
credit facility, Pegasus borrowed $275.0 million under the term loan,
outstanding balances under Pegasus Media & Communications' existing $180.0
million senior, reducing revolving credit facility, Digital Television
Services' existing $90.0
73
<PAGE>
million credit facilities and Pegasus' existing $35.5 million interim letter of
credit facility were repaid and commitments under Digital Television Services'
existing $90.0 million credit facilities and Pegasus' existing $35.5 million
interim letter of credit facility were terminated. Additionally, in connection
with the closing of the new Pegasus Media & Communications credit facility,
Digital Television Services was merged with and into a subsidiary of Pegas
Media & Communications.
In January 2000, Pegasus completed an offering of 3,000,000 shares of its
6.5% Series C convertible preferred stock, with a liquidation preference of
$100 per share plus any accrued but unpaid dividends. Each share of 6.5% Series
C convertible preferred stock will initially be convertible at the option of
the holder into 0.7843 shares of Pegasus' Class A common stock. Pegasus may
redeem the 6.5% Series C convertible preferred stock on or after August 1,
2001, subject to certain conditions, at redemption prices set forth in the
certificate of designation, plus accumulated and unpaid dividends, if any.
Pegasus believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations for at
least the next twelve months. However, Pegasus is highly leveraged and our
ability in the future to repay our existing indebtedness will depend upon the
success of our business strategy, prevailing economic conditions, regulatory
matters, levels of interest rates and financial, business and other factors
that are beyond our control. We cannot assure you that we will be able to
generate the substantial increases in cash flow from operations that we will
need to meet the obligations under our indebtedness. Furthermore, our
agreements with respect to our indebtedness contain numerous covenants that,
among other things, restrict our ability to:
o pay dividends and make certain other payments and investments;
o borrow additional funds;
o create liens; and
o sell our assets.
Failure to make debt payments or comply with our covenants could result in an
event of default which if not cured or waived could have a material adverse
effect on us.
Pegasus closely monitors conditions in the capital markets to identify
opportunities for the effective use of financial leverage. In financing its
future expansion and acquisition requirements, Pegasus would expect to avail
itself of such opportunities and thereby increase its indebtedness. This could
result in increased debt service requirements. We cannot assure you that such
debt financing can be completed on terms satisfactory to Pegasus or at all.
Pegasus may also issue additional equity to fund its future expansion and
acquisition requirements.
Year 2000
The year 2000 issue is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other equipment as the year 2000
is approached and reached. An issue exists for all companies that rely on
computers. This issue involves computer programs and applications that were
written using two digits rather than four to identify the applicable year, and
could result in systems failures or miscalculations. We have completed an
assessment of and taken corrective measures to mitigate the potential adverse
effects the year 2000 issue may have on our operations. Costs in connection
with any modifications to make our systems compliant have not been and are not
expected to be material. We are not currently aware of any operational or
technical problems as a result of the change to the year 2000 and will continue
to monitor the potential adverse impact of the year 2000 issue on our business;
however, there can be no assurance that the year 2000 issue will not have a
material adverse impact on our financial condition or our results of operations
in the future.
Dividend Policy
As a holding company, Pegasus' ability to pay dividends is dependent upon
the receipt of dividends from its direct and indirect subsidiaries. Pegasus
Media & Communiations' credit facility and publicly held debt securities
restricts it from paying dividends to Pegasus. In addition, Pegasus' ability to
pay dividends and to incur indebtedness are subject to certain restrictions
contained in Pegasus' publicly held debt securities, in the terms of Pegasus'
Series A preferred stock and by Pegasus Media & Communications' credit facility
and publicly held debt securities.
74
<PAGE>
Seasonality
Pegasus' revenues vary throughout the year. As is typical in the broadcast
television industry, Pegasus' first quarter generally produces the lowest
revenues for the year and the fourth quarter generally produces the highest
revenues for the year. Pegasus' operating results in any period may be affected
by the incurrence of advertising and promotion expenses that do not necessarily
produce commensurate revenues in the short-term until the impact of such
advertising and promotion is realized in future periods.
Inflation
Pegasus believes that inflation has not been a material factor affecting
its business. In general, Pegasus' revenues and expenses are impacted to the
same extent by inflation. A majority of Pegasus' indebtedness bears interest at
a fixed rate.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). As a result of the subsequent
issuance of SFAS No. 137, SFAS No. 133 is now effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. We
do not expect that the adoption of SFAS No. 133 will have a material effect on
our business, financial position or results of operations.
OTHER
In January 2000, Pegasus entered into an agreement and plan of merger to
acquire Golden Sky Holdings, Inc. for approximately 6.5 million shares of
Pegasus' Class A common stock and the assumed net liabilities of Golden Sky
Holdings, Inc. As of December 31, 1999, Golden Sky Holdings, Inc.'s operations
consisted of providing DIRECTV services to approximately 345,200 subscribers in
certain rural areas of 24 states in which Golden Sky Holdings, Inc. holds the
exclusive rights to provide such services. Upon completion of the acquisition
of Golden Sky Holdings, Inc., it will become a wholly owned subsidiary of
Pegasus.
In January 2000, Pegasus made an investment in Personalized Media
Communications, LLC, an advanced communications technology company, of
approximately $111.8 million, which consisted of $14.3 million in cash, 200,000
shares of Pegasus' Class A common stock (amounting to $18.8 million) and
Pegasus' agreement, subject to certain conditions, to issue warrants to
purchase 1.0 million shares of Pegasus' Class A common stock at an exercise
price of $90.00 per share and with a term of ten years. The fair value of the
warrants to be issued was estimated using the Black-Scholes pricing model and
is approximately $78.8 million. A subsidiary of Personalized Media
Communications, LLC granted to Pegasus an exclusive license for use of
Personalized Media Communications, LLC's patent portfolio in the distribution
of satellite services from specified orbital locations.
75
<PAGE>
GOLDEN SKY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is a discussion of Golden Sky's historical consolidated
results of operations, liquidity and capital resources without giving effect to
the merger, except as otherwise indicated. This discussion should be read in
conjunction with Golden Sky's consolidated financial statements and the related
notes appearing elsewhere in this proxy statement/prospectus.
OVERVIEW
Company History
Golden Sky is the second largest independent provider of DIRECTV
programming in rural markets in the United States. As of December 31, 1999,
Golden Sky was the exclusive provider of DIRECTV programming services to
approximately 345,200 subscribers in its rural markets.
DIRECTV, a division of Hughes Electronics Corporation, is one of two
direct broadcast satellite companies in the United States. Direct broadcast
satellite providers deliver digital television programming and related services
to subscribers via satellite. Golden Sky provides DIRECTV programming services
in rural markets in the United States as a non-voting affiliate of the National
Rural Telecommunications Cooperative. The National Rural Telecommunications
Cooperative is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in rural America. Under a
1992 agreement with DIRECTV, the National Rural Telecommunications Cooperative
acquired exclusive rights for its members and affiliates to distribute DIRECTV
programming services in approximately 250 rural markets in the United States,
representing approximately 9.0 million households, or about 9% of total U.S.
television households. Since Golden Sky's formation in June 1996, it has
acquired the exclusive right to provide DIRECTV programming in 57 rural markets
in 24 states serving approximately 1.9 million households and 141,500
subscribers as of the date of acquisition. The aggregate purchase price for
these acquisitions totaled approximately $298.5 million, or about $160 per
household.
Golden Sky has sought to create a strong local presence in each of its
markets and attempts to increase its subscriber base through increased
penetration of its rural DIRECTV markets. Golden Sky has established
approximately 70 local offices in its territories and dealer relationships with
approximately 450 local retailers of direct broadcast satellite equipment.
During 1999, Golden Sky acquired ten rural DIRECTV markets. These markets
included approximately 134,000 households and served approximately 18,300
subscribers as of the dates of acquisition. The aggregate purchase price for
these recent acquisitions, including direct acquisition costs, approximated
$35.3 million. Also during 1999, Golden Sky acquired certain minority ownership
interests in its rural DIRECTV markets for aggregate consideration of $3.4
million. As a result of its announced merger with Pegasus, Golden Sky has
suspended evaluation of future acquisition opportunities. To the extent Golden
Sky resumes its acquisition activities, its pace of any future acquisitions may
be slower than its historical experience due to, among other factors, a
reduction in the number of attractive acquisition opportunities and capital
constraints.
EBITDA
EBITDA represents earnings before interest, taxes, depreciation and
amortization, non-cash charges, extraordinary items and non-recurring charges.
EBITDA is not a measure of performance under generally accepted accounting
principles and should not be construed as a substitute for consolidated net
income or loss as a measure of performance, or as a substitute for cash flow as
a measure of liquidity. Nevertheless, Golden Sky believes that EBITDA is a
commonly recognized measure of performance in the communications industry. Many
of Golden Sky's financial covenants are also based upon EBITDA. As a result,
investors may use this data to analyze and compare other communications
companies with Golden Sky in terms of operating performance, leverage and
liquidity. Further, Golden Sky believes that EBITDA provides useful information
regarding an entity's ability to incur and service debt. Changes in Golden
Sky's EBITDA may indicate changes in its free cash flows available to incur and
service debt and cover fixed charges. However, EBITDA
76
<PAGE>
is not intended to represent cash flows for the period and should not be
considered in isolation or as a substitute for measures of performance
determined in accordance with generally accepted accounting principles. EBITDA,
as Golden Sky calculates it, is not necessarily comparable to similarly
captioned amounts of other companies.
During the year ended December 31, 1999 Golden Sky:
o used net cash of $61.1 million in operating activities;
o used net cash of $12.2 million in investing activities; and
o provided net cash of $72.1 million from financing activities.
During the year ended December 31, 1998 Golden Sky:
o used net cash of $36.6 million in operating activities;
o used net cash of $159.9 million in investing activities; and
o provided net cash of $187.4 million from financing activities.
During the year ended December 31, 1997 Golden Sky:
o used net cash of $3.1 million in operating activities;
o used net cash of $120.7 million in investing activities; and
o provided net cash of $137.0 million from financing activities.
Churn
Golden Sky's rate of subscriber disconnects, or churn, has increased in
recent periods on both an average monthly and last twelve months basis. During
1999, Golden Sky's average monthly churn approximated 1.8%, compared to 0.8%
during 1998. For the twelve-month periods ended December 31, 1999 and 1998,
Golden Sky's churn rate approximated 15.9% and 7.5%, respectively. Golden Sky's
increased churn rate has resulted from several factors, many of which are
non-recurring and external in nature. Those factors have included, but are not
limited to, the following:
o involuntary disconnects for non-payment of subscribers attracted to
Golden Sky's service during the first half of 1999 by DIRECTV's
free-programming promotions;
o voluntary disconnects by disenchanted subscribers who were adversely
affected by the termination of delivery of certain distant broadcast
network services in January and July 1999 as a result of an agreement
between DIRECTV and the National Association of Broadcasters;
o higher subscriber turnover among former Primestar subscribers; and
o decreases in up-front equipment and installation costs to new
subscribers, which has had the effect of making Golden Sky's service more
affordable for potentially less credit-worthy customers.
As a result of the factors described above, Golden Sky anticipates that it
may experience higher churn rates for at least the next six months. However, as
previously described, many of the factors that have contributed to Golden Sky's
recent higher churn are not expected to recur. Consequently, while there can be
no assurance, Golden Sky expects that its rate of subscriber churn will
approach historical levels during the latter half of 2000.
As a result of Golden Sky's historical and anticipated significant growth
rate, its historical operating results may not be comparable from period to
period.
77
<PAGE>
RESULTS OF OPERATIONS
The following table presents some of the items from Golden Sky's
consolidated statements of operations as a percentage of total revenue for the
periods noted.
<TABLE>
<CAPTION>
Inception To Years Ended December 31,
December 31, ------------------------------------------
1996 1997 1998 1999
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
DBS services ............................ 85.9% 94.6% 98.7% 99.5%
Lease and other ......................... 14.1 5.4 1.3 0.5
-------- ------- ------- -----
Total revenue ............................ 100.0 100.0 100.0 100.0
Costs and Expenses:
Costs of DBS services ................... 51.0 53.5 59.7 63.1
System operations ....................... 10.2 21.8 14.5 14.0
Sales and marketing ..................... 28.6 42.0 42.4 46.2
General and administrative .............. 405.9 13.4 9.8 11.2
Depreciation and amortization ........... 38.0 42.0 30.5 25.6
-------- ------- ------- -----
Total costs and expenses ................. 533.7 172.7 156.9 160.1
-------- ------- ------- -----
Operating loss ........................... (433.7) (72.7) (56.9) (60.1)
Net interest expense and other ........... (23.9) (18.4) (25.0) (31.2)
-------- ------- ------- -----
Loss before extraordinary charge ......... (457.6)% (91.1)% (81.9)% (91.3)%
======== ======= ======= =====
</TABLE>
Revenue. Golden Sky earns revenue by providing DIRECTV programming
services to subscribers within its rural DIRECTV markets. DBS services revenue
includes any combination of various monthly program service plans, additional
monthly premium channel program upgrades, seasonal sports programming packages,
one-time event programming on a pay-per-view basis and miscellaneous fee
revenue related to providing programming to subscribers. Lease and other
revenue principally is comprised of revenue from the rental of DBS equipment to
subscribers.
Costs of DBS Services. Golden Sky's largest cost of providing service to
its subscribers is the wholesale cost of DIRECTV programming and related
services. The principal components of programming costs include miscellaneous
service fees and programming costs paid to the National Rural
Telecommunications Cooperative and a 5% royalty based on programming revenue
paid to DIRECTV.
System Operations. System operations expenses include costs of Golden
Sky's national call center operations, field office operations and other
subscriber service expenses. Golden Sky expects that these expenses will
increase to the extent it continues to make acquisitions and open additional,
or expand existing, field offices. However, many of these costs are fixed in
nature and Golden Sky does not expect that these expenses will increase in
direct proportion to revenue.
Sales and Marketing. Sales and marketing expenses include advertising,
promotional expenses, marketing personnel expenses, commissions paid to Golden
Sky's employees and outside sales agents, net equipment and installation costs
and other marketing overhead costs. Golden Sky subsidizes the cost to the
consumer of DBS equipment and the cost of installation of DBS equipment.
Equipment and installation revenues and related expenses are recognized upon
the delivery and installation of DBS equipment. Net transaction costs
associated with the sale and installation of DBS equipment are reported as a
component of sales and marketing expenses in Golden Sky's statement of
operations. Golden Sky invests significantly to develop its sales and
distribution systems and to acquire new subscribers. A large part of Golden
Sky's sales and marketing expense is comprised of costs related to the addition
of new subscribers. Although Golden Sky anticipates continuing to incur these
costs as it builds its subscriber base, these costs are not expected to
increase in direct proportion to revenue.
General and Administrative. General and administrative expenses include
corporate general office and administration expenses incurred primarily at
Golden Sky's Kansas City corporate office. Golden Sky expects that these
expenses will increase as it grows and continues to expand its infrastructure.
However, since many of these expenses are fixed in nature, general and
administrative expenses are not expected to increase in direct proportion to
increases in subscribers and revenue.
Depreciation and Amortization. Depreciation and amortization includes
amortization of intangible assets associated with acquisitions and depreciation
of property and equipment.
78
<PAGE>
Income Taxes. Golden Sky is subject to income taxation under Subchapter C
of the Internal Revenue Code. To date, Golden Sky has not recognized any income
tax benefits for financial reporting purposes because it has incurred operating
losses in all periods, and realization of future tax benefits is uncertain. As
of December 31, 1999, Golden Sky had net operating loss carryforwards for
federal income tax purposes of approximately $179.0 million. These net
operating loss carryforwards expire beginning in 2011.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Revenue. DBS services revenue for the year ended December 31, 1999 totaled
$139.9 million, which represented an 87% increase as compared to the prior
year. These higher revenues resulted from the increase in the number of
subscribers to Golden Sky's DIRECTV service, offset somewhat by lower revenues
per subscriber. The average number of subscribers in Golden Sky's rural DIRECTV
markets during 1999 increased to approximately 285,400, compared to
approximately 151,100 during 1998. Average monthly revenue per subscriber
approximated $41.00 and $41.75 during those same periods. The decrease in
revenue per subscriber resulted primarily from lower revenues from distant
broadcast network services and lower sports programming revenues. Distant
broadcast network services revenue decreased as a result of an agreement
between DIRECTV and the National Association of Broadcasters. Pursuant to that
agreement, provision of certain distant broadcast network services to a number
of Golden Sky's subscribers was terminated during January and July 1999. The
termination of these distant broadcast network services adversely impacted
Golden Sky's revenues and contributed to its increased churn. Golden Sky does
not anticipate any further termination of these services to its existing
subscribers as a result of federal legislation that was enacted in November
1999.
Costs of DBS Services. Costs of DBS services increased $43.4 million, or
96%, during 1999 to $88.7 million. This increase resulted from the 89% increase
in the average number of subscribers previously described, and from higher fees
charged by DIRECTV for satellite and ground service operations. As a percentage
of total revenue, the costs of DBS services increased to 63.1% during 1999,
compared to 59.7% during 1998. This increase resulted from the higher fees
charged by DIRECTV previously described.
System Operations. System operations expenses totaled $19.7 million during
the year ended December 31, 1999, an $8.7 million increase, or 79%, over 1998.
These costs rose as a result of the increased number of field offices and
related activity resulting from Golden Sky's acquisitions of rural DIRECTV
markets, as well as from subscriber growth. As a percentage of total revenue,
system operations expenses decreased to 14.0% during 1999, from 14.5% during
1998. This decrease in system operations expenses as a percentage of total
revenues resulted primarily from scale economies realized from Golden Sky's
larger subscriber base.
Sales and Marketing. Sales and marketing expenses totaled $64.9 million
during the year ended December 31, 1999, an increase of $32.7 million, or 102%,
compared to the year ended December 31, 1998. Sales and marketing costs per new
subscriber activation approximated $380 and $320 during the years ended
December 31, 1999 and 1998, respectively.
The increase in sales and marketing expenses resulted from:
o an 82% increase in the number of new subscriber activations during 1999;
o higher subscriber acquisition costs associated with Golden Sky's
conversions of Primestar subscribers to its DIRECTV service;
o increased equipment and installation subsidies provided by Golden Sky to
its subscribers; and
o increased costs associated with free programming provided to new
subscribers under certain DIRECTV national sales promotions.
In April 1999, Hughes acquired Primestar's medium-power broadcast
satellite business and high-powered DBS assets. Subsequent to Hughes'
announcement of its proposed acquisition of Primestar, EchoStar Communications
Corporation began to offer increased promotional and other incentives to
Primestar customers, as well as to EchoStar retailers, to entice the conversion
of Primestar subscribers to EchoStar's competing DBS service, the DISH Network.
EchoStar is the second largest provider of DBS service in the
79
<PAGE>
United States. Consequently, beginning in February 1999 Golden Sky increased
its marketing efforts with respect to Primestar subscribers. Golden Sky's
increased Primestar conversion efforts include, among other things, an offer of
free equipment and installation to current Primestar subscribers, as well as
higher sales commission incentives to both its internal and external sales
forces. Approximately 30% of Golden Sky's gross subscriber additions during
1999 were conversions of former Primestar subscribers. While Golden Sky
believes that opportunities continue to exist to convert additional Primestar
subscribers to its DIRECTV programming service, it expects to accomplish such
conversions at a slower rate in future periods. Consequently, while there can
be no assurance, Golden Sky anticipates that its subscriber acquisition costs
per new subscriber activation will decrease in future periods.
General and Administrative. During the year ended December 31, 1999,
general and administrative expenses totaled $15.7 million, compared to $7.4
million during 1998. As a percentage of total revenue, general and
administrative expenses increased to 11.2% during 1999, from 9.8% during 1998.
These increases in general and administrative expenses resulted from the
addition of administrative resources necessary to support Golden Sky's growth
and increased bad debts expenses. Golden Sky's bad debts expenses increased
from $1.5 million, or 2.0% of total revenue, during 1998, to $4.1 million, or
2.9% of total revenue, during 1999. This increase in bad debts expense resulted
from the increases in subscribers and revenues previously described, as well as
from higher bad debts associated with former Primestar subscribers and
subscribers attracted to Golden Sky's service during the first half of 1999 by
DIRECTV's free programming promotions.
EBITDA. EBITDA for the year ended December 31, 1999 totaled negative $48.3
million, compared to EBITDA of negative $20.0 million during the year ended
December 31, 1998. This increase in negative EBITDA primarily resulted from the
higher sales and marketing expenses and related new subscriber activations
previously described.
Depreciation and Amortization. Depreciation and amortization expenses
increased $12.8 million to $36.0 million during the year ended December 31,
1999, compared to $23.2 million during the year ended December 31, 1998. This
increase reflects the amortization of higher intangible asset balances
resulting from Golden Sky's acquisitions of rural DIRECTV markets.
Interest Expense. Interest expense totaled $45.0 million during the year
ended December 31, 1999 and $20.5 million during 1998. This increase of $24.5
million resulted from higher outstanding debt balances and an increase in
Golden Sky's weighted-average interest rate. Golden Sky's weighted-average
interest rate increased due to the issuance of Golden Sky Systems' 123/8%
senior subordinated notes due 2006 in July 1998 and Golden Sky DBS's 131/2%
senior discount notes due 2007 in February 1999.
Merger, Initial Public Offering and Other Non-Operating Expenses. On July
9, 1999, Golden Sky DBS filed a registration statement with the Securities and
Exchange Commission for the initial public offering of its common stock. As a
result of its pending merger with Pegasus, Golden Sky has suspended efforts to
consummate Golden Sky DBS's initial public offering. Accordingly, related
offering costs totaling approximately $466,000 were expensed during the fourth
quarter of 1999. Further, direct out-of-pocket costs related to Golden Sky's
pending merger with Pegasus of $391,000 were recognized as a non-operating
expense during the fourth quarter of 1999. Other non-operating expenses of
approximately $402,000 principally resulted from a loss incurred upon Golden
Sky's disposition of certain non-essential assets.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Revenue. DBS services revenue for the year ended December 31, 1998 totaled
$74.9 million, which represented a 355% increase as compared to the prior year.
This increase was principally attributable to the increase in the number of
subscribers. The average number of subscribers during 1998 increased to
approximately 151,100, compared to approximately 33,200 during 1997. Average
monthly revenue per subscriber approximated $41.75 and $43.75 during these same
periods. The decrease in average monthly revenue per subscriber principally
resulted from lower lease and other revenues during 1998.
80
<PAGE>
Costs of DBS Services. Costs of DBS services increased $36.0 million, or
387%, during 1998, to $45.3 million. This increase is consistent with the
increase in the average number of subscribers. As a percentage of total
revenue, the costs of DBS services increased to 59.7% during 1998, compared to
53.5% in 1997. This increase resulted largely from increased programming costs.
System Operations. System operations costs totaled $11.0 million for the
year ended December 31, 1998, a $7.2 million increase, or 190%, over 1997.
These costs rose as a result of the increased number of field offices and
related activity resulting from Golden Sky's continued acquisition of rural
DIRECTV markets, as well as from subscriber growth. As a percentage of total
revenue, system operations expenses declined to 14.5% for the year ended
December 31, 1998, from 21.8% during the year ended December 31, 1997. The
decrease in system operations expenses as a percentage of total revenues
resulted from the increases in subscribers and revenues as previously
described.
Sales and Marketing. Sales and marketing expenses totaled $32.2 million
during the year ended December 31, 1998, an increase of $24.9 million compared
to the previous year. This increase principally resulted from the 265% increase
in new subscriber activations during 1998, as compared to 1997. Sales and
marketing costs per new subscriber activation approximated $320 during the year
ended December 31, 1998 and $280 during the year ended December 31, 1997.
General and Administrative. During the year ended December 31, 1998,
general and administrative expenses totaled $7.4 million, compared to $2.3
million during 1997. The increase in general and administrative expenses
resulted from the addition of administrative resources necessary to support
Golden Sky's growth. As a percentage of total revenue, general and
administrative expenses decreased to 9.8% during the year ended December 31,
1998, from 13.4% during 1997. This decrease reflects the continued leveraging
of these costs, which are partially fixed in nature, over increased subscribers
and revenues.
EBITDA. EBITDA for the year ended December 31, 1998 totaled negative $20.0
million, compared to EBITDA of negative $5.4 million during the same period in
1997. This increase in negative EBITDA principally resulted from the increases
in sales and marketing activities and related new subscriber activations
previously described.
Depreciation and Amortization. Depreciation and amortization expenses
increased $15.9 million to $23.2 million during the year ended December 31,
1998, compared to $7.3 million during the year ended December 31, 1997. This
increase resulted from higher intangible assets balances, which resulted from
Golden Sky's acquisition of additional rural DIRECTV markets.
Interest Expense. Interest expense totaled $20.5 million during the year
ended December 31, 1998, as compared to $3.2 million during 1997. This increase
of $17.3 million primarily resulted from higher outstanding debt balances and,
to a lesser degree, from an increase in weighted-average interest costs.
LIQUIDITY AND CAPITAL RESOURCES
Golden Sky has experienced net losses as well as negative EBITDA and cash
flows from operations since its inception. These shortfalls are primarily the
result of Golden Sky's rapid subscriber growth and acquisitions of rural
DIRECTV markets. In particular, Golden Sky has incurred significant sales and
marketing expenses in its effort to rapidly build its subscriber base. Many of
these expenses, which are expensed as incurred and include advertising and
promotional expenses, sales commissions and DBS equipment and installation
subsidies, are incurred at or before the time a new subscriber is activated. As
a result, revenue attributable to new subscribers lags behind the expense
incurred in acquiring them. The impact of this lag generally increases with the
rate at which Golden Sky adds subscribers. Golden Sky believes that its
subscriber acquisition costs will continue to negatively affect its operating
results for at least the next year as it continues to add new subscribers.
However, as long as a subscriber remains in service, future operating results
benefit from a recurring monthly revenue stream with minimal additional sales
and marketing expense. Provided churn remains relatively low, Golden Sky
believes that its investment in building its subscriber base rapidly will
enhance its cash flow and operating results in the longer term.
Improvement in Golden Sky's results of operations is principally dependent
upon its ability to cost effectively expand its subscriber base, control
subscriber churn and effectively manage its operating and
81
<PAGE>
overhead costs. Golden Sky plans to reduce its future operating and overhead
costs by transitioning from a principally direct sales distribution model to a
largely indirect, retail sales distribution model. Accordingly, during the year
ending December 31, 2000 Golden Sky plans, among other things, to:
o close approximately 30 of its local sales offices;
o reduce its corporate overhead expenses through headcount and other
expense reductions; and
o increase the number of third-party retailers of Golden Sky's direct
broadcast satellite television service in its rural DIRECTV markets.
Golden Sky estimates that it will incur aggregate, non-recurring costs of
approximately $1.5 million in connection with these actions. These costs are
expected to primarily consist of employee severance and lease termination
costs.
Golden Sky's operations require substantial capital for:
o financing subscriber growth (including DBS equipment and installation
subsidies and marketing and selling expenses);
o investments in, and maintenance of, field offices in Golden Sky's rural
DIRECTV markets;
o financing infrastructure development costs necessary to support the
growth of Golden Sky's business; and
o funding of start-up losses and other working capital requirements.
Historically, Golden Sky also has utilized substantial capital to acquire
rural DIRECTV markets. Golden Sky's capital expenditures, inclusive of
acquisitions of rural DIRECTV markets and related minority interests, totaled
$40.2 million during 1999, $107.8 million during 1998 and $121.0 million during
1997. Net cash used in operations totaled $61.1 million in 1999, $36.6 million
in 1998 and $3.1 million in 1997.
To date, Golden Sky's acquisitions, subscriber growth and operations have
been financed from borrowings under Golden Sky Systems' bank credit facility,
proceeds from the offering of Golden Sky Systems' 12 3/8% Notes, proceeds from
the offering of Golden Sky DBS's 13 1/2% Notes, proceeds from the issuance of
capital stock, and to a lesser extent, the issuance of promissory notes to
sellers of rural DIRECTV markets.
During the year ended December 31, 1999, Golden Sky's net cash flows from
financing activities totaled $72.1 million. This was comprised of:
o gross proceeds of $100.0 million from the offering of Golden Sky DBS's
13 1/2% Notes, which it completed in February 1999;
o net repayments of $15.0 million under Golden Sky Systems' bank credit
facility;
o repayments of other debt totaling $8.8 million;
o increased deferred financing costs of $5.5 million resulting from the
amendment of Golden Sky Systems' bank credit facility and the offering
of Golden Sky DBS's 13 1/2% Notes; and
o capital contributions of $1.4 million received from certain minority
interest holders.
In 1998, Golden Sky's net cash flows from financing activities of $187.4
million were comprised of:
o net proceeds of $189.2 million from the offering of Golden Sky
Systems' 12 3/8% Notes;
o net borrowings of $7.0 million under Golden Sky Systems' bank credit
facility;
o deferred financing costs of $5.1 million resulting from the amendment
of Golden Sky Systems' bank credit facility and the offering of Golden
Sky Systems' 12 3/8% Notes; and
o $3.7 million of repayments on other debt.
82
<PAGE>
In 1997, Golden Sky's net cash flows from financing activities of $137.0
million were comprised of:
o $71.1 million from the issuance of preferred stock;
o deferred financing costs of $3.3 million resulting from the execution
of Golden Sky Systems' bank credit facility; and
o $69.2 million of net borrowings under Golden Sky Systems' bank credit
facility and other indebtedness.
Credit Facility
Golden Sky Systems has a credit facility with a group of banks that
provides for a $150.0 million line of credit to fund acquisitions and working
capital requirements. Of this amount, $35.0 million is in the form of a term
loan facility and $115.0 million is in the form of a revolving credit facility,
including a letter of credit sub-limit of $40.0 million. As of December 31,
1999, Golden Sky Systems (1) had fully utilized the entire $35.0 million of
term loan availability, (2) had borrowed $17.0 million under the revolving
credit line, and (3) had utilized approximately $19.6 million of the letter of
credit sub-facility. Availability under the revolving credit line depends upon
satisfaction of various financial and operating covenants as well as minimum
subscriber base requirements.
The term loan amortizes in specified quarterly installments from March 31,
2002 through maturity on December 31, 2005. Availability of revolving loan
borrowings decreases by specified amounts over the period from March 31, 2001
through maturity on September 30, 2005. Borrowings under the credit facility
bear interest at variable rates (approximately 10.0% as of December 31, 1999)
calculated on a base rate, which is either the prime rate or LIBOR, plus an
applicable margin, with reductions under some circumstances, based on leverage.
As of September 30, 1999, Golden Sky Systems was not in compliance with
certain of the restrictive covenants prescribed by its credit facility. During
January 2000, Golden Sky Systems completed an amendment to the credit facility.
The amendment, which was effective as of December 31, 1999, waived Golden Sky
Systems' third quarter 1999 covenant violations and amended certain fourth
quarter 1999 and year 2000 covenant requirements. Pursuant to the amendment,
Golden Sky Systems may borrow up to an additional $20.0 million under the
credit facility prior to March 31, 2000. Any such incremental borrowings, which
are secured by letters of credit provided by certain of Golden Sky Holdings'
shareholders, must be repaid by May 31, 2000 from the proceeds of either a
private or public equity offering. Upon repayment of the incremental borrowings
prior to May 31, Golden Sky Systems will have potential incremental borrowing
capacity during the year ending December 31, 2000 equal to the lesser of the
proceeds received from either a public or private equity offering or $20.0
million. Coincident with the amendment of the credit facility, Golden Sky
Holdings entered into stock subscription agreements with certain of its
shareholders for an aggregate of $20.0 million of its preferred stock. Also in
January 2000, the credit facility was further amended to approve the change in
ownership of Golden Sky that would result from the merger with Pegasus. As of
December 31, 1999, Golden Sky was in compliance with the credit facility's
amended covenants.
12 3/8% Notes
On July 31, 1998, Golden Sky Systems completed the sale of $195.0 million
aggregate principal amount at maturity of its 12 3/8% Notes. Interest on the
12 3/8% Notes is payable in cash semi-annually on February 1 and August 1 of
each year. The 12 3/8% Notes mature on August 1, 2006. The offering of these
notes resulted in net proceeds of approximately $189.2 million after payment of
underwriting discounts and other issuance costs. In the event Golden Sky's
merger with Pegasus is consummated, Golden Sky will be required to make an
offer to the holders of the 12 3/8% Notes to purchase those notes for 101% of
their principal amount plus accrued interest. If Golden Sky's offer for the
12 3/8% Notes is accepted by any of its note holders, and it is unable to
purchase those notes, Golden Sky may be in default of the terms of the 12 3/8%
Notes Indenture. Pegasus has entered into a commitment letter with an
investment bank under which that investment bank has agreed to purchase any and
all 12 3/8% Notes tendered in response to Golden Sky's offer to purchase. This
commitment is subject to the execution of definitive documentation and
customary closing conditions. There can be no assurance that Pegasus will be
able to agree on definitive documentation with the investment bank or make
alternative arrangements if necessary.
83
<PAGE>
13 1/2% Notes
On February 19, 1999, Golden Sky DBS completed the sale of $193.1 million
aggregate principal amount at maturity of its 13 1/2% Notes. Interest on these
notes is payable in cash semi-annually on March 1 and September 1 of each year,
with the first cash interest payment due on September 1, 2004. The 13 1/2% Notes
mature on March 1, 2007. These notes were offered at a substantial discount and
resulted in net proceeds of approximately $95.4 million, after the payment of
underwriting discounts and other issuance costs aggregating approximately $4.7
million. In the event Golden Sky's merger with Pegasus is consummated, Golden
Sky DBS will be required to make an offer to the holders of the 13 1/2% Notes to
purchase those notes for 101% of their accreted value plus accrued interest. If
Golden Sky DBS' offer for the 13 1/2% Notes is accepted by any of its note
holders, and it is unable to purchase those notes, Golden Sky DBS may be in
default of the terms of the 13 1/2% Notes Indenture. Pegasus has entered into a
commitment letter with an investment bank under which that investment bank has
agreed to purchase any and all 13 1/2% Notes tendered in response to Golden Sky
DBS' offer to purchase. This commitment is subject to the execution of
definitive documentation and customary closing conditions. There can be no
assurance that Pegasus will be able to agree on definitive documentation with
the investment bank or make alternative arrangements if necessary.
Future Capital Requirements
Golden Sky's future capital requirements will depend upon a number of
factors, including the rate of its internal subscriber growth, the extent to
which it completes additional acquisitions, if any, and the working capital
needs necessary to accommodate such growth. Golden Sky expects to continue to
expand its marketing efforts in order to increase its subscriber penetration.
As previously described, Golden Sky subsidizes a portion of the cost of DBS
equipment and subscriber installations. The extent of Golden Sky's future
subsidies of DBS equipment and installations may materially affect its
liquidity and capital requirements. Golden Sky also expects that continued
investment in its administrative and computer systems will be necessary to
support its increased size and continued internal growth. Excluding any costs
associated with the acquisition of additional rural DIRECTV markets, Golden Sky
anticipates that its total capital expenditures, primarily related to expanding
facilities and information systems for its corporate office, customer service
operations and field offices, will not exceed $5.0 million during the year
ending December 31, 2000.
Golden Sky's operating costs and working capital requirements are partly a
function of its rights and obligations under its agreements with the National
Rural Telecommunications Cooperative and the National Rural Telecommunications
Cooperative's agreement with Hughes. The National Rural Telecommunications
Cooperative is currently in litigation with Hughes and its subsidiary DIRECTV
over the scope and extent of certain of these rights. On January 10, 2000,
Golden Sky and Pegasus filed a class action lawsuit in federal court in Los
Angeles against DIRECTV as representatives of a proposed class that would
include all members and affiliates of the National Rural Telecommunications
Cooperative that are distributors of DIRECTV. The complaint contains causes of
action for various torts, common counts and declaratory relief based on
DIRECTV's failure to provide the National Rural Telecommunications Cooperative
with premium programming, thereby preventing the National Rural
Telecommunications Cooperative from providing this programming to the class
action members and affiliates. The claims are also based on DIRECTV's position
with respect to launch fees and other benefits, term and rights of first
refusal. The complaint seeks monetary damages and a court order regarding the
rights of the National Rural Telecommunicaitons Cooperative and its members and
affiliates. See Business of Pegasus -- Legal Proceedings. On February 10, 2000,
Pegasus and Golden Sky filed an amended complaint, which added new tort claims
against DIRECTV for interference with plaintiffs' relationships with
manufacturers, distributors and dealers of direct broadcast satellite
equipment. Pegasus and Golden Sky also withdrew the class action allegations to
allow a new class action to be filed on behalf of the members and affiliates of
the National Rural Telecommunications Cooperative. The outcome of this
litigation and the litigation filed by the National Rural Telecommunications
Cooperative could have a material adverse effect on the scope and duration of
Golden Sky's right to provide DIRECTV programming in its rural markets, its
capital requirements and its costs of operations.
During 1999, Golden Sky acquired ten rural DIRECTV markets. These markets
included approximately 134,000 households and served approximately 18,300
subscribers as of the dates of acquisition. The aggregate purchase price for
these acquisitions, including direct acquisition costs, approximated $35.3
million. As noted above under -- Overview -- Company History, Golden Sky has
suspended evaluation of future acquisition opportunities as a result of its
pending merger with Pegasus. To the extent Golden Sky resumes its acquisition
activities and identifies attractive acquisition candidates in the future, it
may require additional capital to complete such acquisitions.
84
<PAGE>
Golden Sky is highly leveraged and, to the extent it is able to borrow
additional funds under Golden Sky Systems' credit facility or otherwise, its
leverage will continue to increase. The approximately $9.8 million of seller
notes payable outstanding at December 31, 1999 mature as follows: $2.9 million
in 2000, $3.0 million in 2001, $2.9 million in 2002, and $1.0 million in 2003.
The ability of Golden Sky's subsidiaries to pay dividends and make other
distributions and advances is subject to, among other things, the terms of
their debt instruments and applicable law. Golden Sky Systems' credit facility
and the indenture governing Golden Sky Systems' 12 3/8% Notes contain
restrictive covenants that limit its ability to pay dividends or make
distributions to Golden Sky DBS, its direct parent company. Golden Sky cannot
assure you that Golden Sky Systems will be in compliance with these covenants
at the time of a required interest payment on Golden Sky DBS' debt instruments.
Golden Sky currently expects that it may be difficult for Golden Sky Systems to
generate the requisite dividend capacity to enable Golden Sky DBS to make the
initial cash interest payments on its 13 1/2% Notes. Golden Sky Systems' ability
to generate sufficient dividend capacity under the indenture governing the
12 3/8% Notes to service Golden Sky DBS's 13 1/2% Notes and to comply with the
financial and other covenants in Golden Sky Systems' credit facility will
depend upon the extent to which Golden Sky pursues acquisitions, incurs
additional indebtedness, incurs operating expenses, makes capital expenditures
and generates adequate subscriber revenue, among other things. To the extent
these vary significantly from Golden Sky's current expectations, it is likely
that Golden Sky will not be able to make Golden Sky DBS's initial interest
payments absent consents from its lenders and existing bondholders. Moreover,
any significant adverse developments would likely preclude Golden Sky DBS from
being able to access Golden Sky Systems' cash flow for these initial interest
payments.
As of December 31, 1999, Golden Sky had unrestricted cash on hand of
approximately $3.3 million. While there can be no assurance, Golden Sky
believes it has sufficient cash and availability under Golden Sky Systems'
amended bank credit facility to finance Golden Sky's expected internal growth
through at least December 31, 2000. There are a number of factors, some of
which may be beyond Golden Sky's control or ability to predict, that could
require it to raise additional capital. These factors include unexpected
increases in operating costs and expenses, subscriber growth in excess of that
currently expected, an increase in the cost of acquiring subscribers or
possible acquisitions of additional rural DIRECTV markets. Additional financing
also may be required to meet Golden Sky's debt service requirements. There can
be no assurance that additional financing will be available on terms acceptable
to Golden Sky, or at all, and if available, that the proceeds of this financing
would be sufficient to enable Golden Sky to meet its debt service requirements
or completely execute its business plan.
Year 2000 Readiness
Many existing computer systems and applications currently use two-digit
date fields to designate a particular year. Date sensitive systems and
applications may recognize the year 2000 as 1900 or not at all. The inability
to recognize or properly treat the year 2000 may cause computer systems and
applications to incorrectly process critical financial and operational
information. During 1999, Golden Sky undertook an effort to identify and
correct any potential year 2000 issues that may have existed with its
information systems, suppliers and facilities. As of the date of this proxy
statement/prospectus, Golden Sky's business has not been affected by the year
2000 issue. Golden Sky will continue to monitor the impact of the year 2000
issue on its business throughout the year ending December 31, 2000. There can
be no assurance that the year 2000 issue will not adversely affect Golden Sky's
business, financial condition or results of operations in future periods.
The foregoing constitutes a year 2000 statement and readiness disclosure
subject to the protections afforded it by the Year 2000 Information and
Readiness Disclosure Act of 1998.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"). As a result of the
subsequent issuance of FAS No. 137, FAS No. 133 is now effective for fiscal
years beginning after June 15, 2000. FAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities.
Currently, Golden Sky has no derivative instruments or hedging arrangements.
Accordingly, adoption of FAS No. 133 is not expected to have a material effect
on Golden Sky's business, financial position or results of operations.
85
<PAGE>
BUSINESS OF PEGASUS
General
Pegasus is:
o The largest independent distributor of DIRECTV(R) with 752,800
subscribers at December 31, 1999. We have the exclusive right to
distribute DIRECTV digital broadcast satellite services to over 5.3
million rural households in 36 states. We distribute DIRECTV through the
Pegasus retail network, a network in excess of 2,500 independent
retailers.
o The owner or programmer of ten TV stations affiliated with either Fox,
UPN or the WB.
o One of the fastest growing media companies in the United States. We have
increased our revenues at a compound growth rate of 89% per annum since
our inception in 1991.
Direct Broadcast Satellite Television
The introduction of direct broadcast satellite receivers is widely
regarded as the most successful introduction of a consumer electronics product
in U.S. history, surpassing the rollout of color televisions, videocassette
recorders and compact disc players. According to a recent Paul Kagan study, in
1998 direct broadcast satellite was the fastest growing multichannel television
service in the country, capturing almost two out of every three new subscribers
to those services. There are currently three nationally branded direct
broadcast satellite programming services: DIRECTV, Primestar and EchoStar. At
December 31, 1999, there were 11.5 million direct broadcast satellite
subscribers in the United States:
o 6.7 million DIRECTV subscribers, including approximately 5.2 million
subscribers served by DIRECTV itself, 1.1 million subscribers served by
Pegasus and Golden Sky and 400,000 subscribers served by the approximately
100 other DIRECTV rural affiliates;
o 1.4 million Primestar subscribers; and
o 3.4 million EchoStar subscribers.
All three direct broadcast satellite programming services are digital satellite
services, and therefore require that a subscriber install a satellite receiving
antenna or dish and a digital receiver. DIRECTV and EchoStar require a
satellite dish of approximately 18 inches in diameter that may be installed by
the consumer without professional assistance. Primestar requires a dish of
approximately 36 inches in diameter that generally must be professionally
installed. The market shares of DIRECTV, Primestar and EchoStar among all
direct broadcast satellite subscribers nationally are currently 58%, 12% and
30%, respectively. The Carmel Group has estimated that the number of direct
broadcast satellite subscribers will grow to 21.1 million by 2003.
Hughes completed the acquisition of Primestar's medium-power direct
broadcast satellite business on May 22, 1999, and completed the acquisition of
related high-power satellite assets on June 8, 1999. Hughes is currently
operating Primestar only during a transition period while it converts Primestar
subscribers to DIRECTV subscribers. At the time of the acquisition, we
estimated that there were approximately 250,000 Primestar subscribers in our
DIRECTV exclusive territories who could become our subscribers if they choose
to receive DIRECTV programming.
In 1999, MCI WorldCom transferred a license to EchoStar to operate another
direct broadcast satellite business in a different orbital location. We believe
this will help increase the overall competitive position of direct broadcast
satellite relative to cable. However, the transaction could also increase
EchoStar's competitive position relative to DIRECTV.
DIRECTV
DIRECTV is a service of Hughes Electronics, a subsidiary of General Motors
Corporation. DIRECTV offers in excess of 200 entertainment channels of near
laser disc quality video and compact disc quality audio
86
<PAGE>
programming. DIRECTV currently transmits via four high-power Ku band
satellites. We believe that DIRECTV's extensive line-up of cable networks,
pay-per-view movies and events and sports packages, including the exclusive
"NFL Sunday Ticket," have enabled DIRECTV to capture a majority market share of
existing direct broadcast satellite subscribers and will continue to drive
strong subscriber growth for DIRECTV services in the future. DIRECTV added 1.6
million new subscribers in 1999.
DIRECTV Rural Affiliates
Prior to the launch of DIRECTV's programming service, Hughes Electronics,
which was succeeded by its subsidiary DIRECTV, entered into an agreement with
the National Rural Telecommunications Cooperative authorizing the National
Rural Telecommunications Cooperative to offer its members and associates the
opportunity to acquire exclusive rights to distribute DIRECTV programming
services in rural areas of the United States. The National Rural
Telecommunications Cooperative is a cooperative organization whose members and
associates are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the United States. Approximately 250
National Rural Telecommunications Cooperative members and associates acquired
such exclusive rights, thereby becoming DIRECTV rural affiliates. The DIRECTV
exclusive territories acquired by DIRECTV's rural affiliates include
approximately 9.0 million rural households. Pegasus was the largest of the
original DIRECTV rural affiliates, acquiring a DIRECTV exclusive territory of
approximately 500,000 homes in four New England states. Since 1996 we have
increased our DIRECTV exclusive territories to more than 5.3 million homes
through the completed or pending acquisitions of 95 other DIRECTV rural
affiliates, including the acquisition of Digital Television Services, Inc.,
with which we merged in 1998.
Pegasus Rural Focus and Strategy
We believe that direct broadcast satellite and other digital satellite
services will achieve disproportionately greater consumer acceptance in rural
areas than in metropolitan areas. Direct broadcast satellite services have
already achieved a penetration of more than 17% in rural areas of the United
States, as compared to approximately 5% in metropolitan areas.
Our long-term goal is to become an integrated provider of direct broadcast
satellite and other digital satellite services for the 76.0 million people,
30.0 million homes and 3.0 million businesses located in rural areas of the
United States. To accomplish our goal, we are pursuing the following strategy:
o Continue to Grow Our Rural Subscriber Base by Aggressively Marketing
DIRECTV. Pegasus currently serves in excess of 750,000 DIRECTV
subscribers, which represents a penetration of approximately 14.1%. Our
rate of growth has accelerated as we have increased our scale and expanded
the Pegasus network of independent retailers.
o Continue to Acquire Other DIRECTV Rural Affiliates. We currently own
approximately 59% of the DIRECTV exclusive territories held by DIRECTV's
rural affiliates. We have had an excellent track record of acquiring
DIRECTV rural affiliates and believe that we have a competitive advantage
in acquiring additional DIRECTV rural affiliates. We base this belief on
our position as the largest DIRECTV rural affiliate, our access to the
capital markets and our strong reputation in the direct broadcast
satellite industry. We will continue to pursue our strategy of acquiring
other DIRECTV rural affiliates.
o Continue to Develop the Pegasus Retail Network. We have established the
Pegasus network of independent retailers in order to distribute DIRECTV in
our DIRECTV exclusive territories. Our consolidation of DIRECTV's rural
affiliates has enabled us to expand the Pegasus retail network to over
2,500 independent retailers in 36 states. We believe that the Pegasus
retail network is one of the few sales and distribution channels for
digital satellite services with broad and effective reach in rural areas
of the U.S. We intend to further expand the Pegasus retail network in
order to increase the penetration of DIRECTV in rural areas and to enable
us to distribute additional digital satellite services that will
complement our distribution of DIRECTV.
87
<PAGE>
o Generate Future Growth By Bundling Additional Digital Satellite Services
with DIRECTV. We believe that new digital satellite services, such as
digital audio services, broadband multimedia services and mobile satellite
services, will be introduced to consumers and businesses in the next five
years.
These services, like direct broadcast satellite, should achieve
disproportionate success in rural areas. However, because there are limited
sales and distribution channels in rural areas, new digital satellite service
providers will confront the same difficulties that direct broadcast satellite
service providers have encountered in establishing broad distribution in rural
areas, as compared to metropolitan areas. We believe that the Pegasus retail
network will enable us to establish relationships with digital satellite
service providers that will position us to capitalize on these new
opportunities.
Satellite Services in Rural Areas
Rural areas include approximately 85% of the total landmass of the
continental United States and have an average home density of less than 12
homes per square mile. Because the cost of reaching a household by a cable or
other wireline distribution system is generally inversely proportional to home
density and the cost of providing satellite service is not, satellite services
have strong cost advantages over cable in rural areas.
There are approximately 76.0 million people, 30.0 million households and
3.0 million businesses located in rural areas of the United States. Annual
household income in rural areas totaled over $1.1 trillion in 1997, an average
of approximately $38,000 per household. Rural areas therefore represent a large
and attractive market for direct broadcast satellite and other digital
satellite services. Approximately 65% of all U.S. direct broadcast satellite
subscribers reside in rural areas. It is likely that future digital satellite
services, such as soon to be launched digital audio services and satellite
broadband multimedia services, will also achieve disproportionate success in
rural areas as compared to metropolitan areas.
It is difficult, however, for satellite and other service providers to
establish sales and distribution channels in rural areas. In contrast to
metropolitan areas, where there are many strong national retail chains, few
national retailers have a presence in rural areas. Most retailers in rural
areas are independently owned and have only one or two store locations. For
these reasons, satellite providers seeking to establish broad and effective
rural distribution have limited alternatives:
o They may seek to distribute their services through one of the few
national retailers, such as Radio Shack or Wal-Mart, that have a strong
retail presence in rural areas.
o They may seek to establish direct sales channels in rural areas, as
Primestar initially sought to do through its cable partners.
o They may seek to distribute through national networks of independent
retailers serving rural areas, such as have been established by EchoStar
and by Pegasus.
Consolidation of DIRECTV Rural Affiliates
When DIRECTV was launched in 1994, small DIRECTV rural affiliates held
approximately 95% of the DIRECTV rural affiliate exclusive territories. In
1996, Pegasus first acquired another DIRECTV rural affiliate, thereby beginning
a process of consolidation that has significantly changed the composition of
DIRECTV's rural affiliates. Since 1996, Pegasus, its subsidiary, Digital
Television Services, Inc., and Golden Sky Systems have acquired approximately
150 DIRECTV rural affiliates. Today, Pegasus represents 59% of the DIRECTV
exclusive territories held by DIRECTV's rural affiliates, Golden Sky holds 21%,
and the approximately 100 remaining rural affiliates total 20%. Pegasus
believes that consolidation among DIRECTV's rural affiliates will continue.
88
<PAGE>
As of December 31, 1999, we distributed DIRECTV in the following DIRECTV
exclusive territories:
<TABLE>
<CAPTION>
Exclusive Total Homes Not Homes
DIRECTV Homes in Passed By Passed By Total
Territories Territory Cable Cable Subscribers Penetration
- ------------------------ ----------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Northeast .............. 751,745 182,245 569,500 83,928 11.2%
Central ................ 1,138,651 301,052 837,599 163,272 14.3%
Southeast .............. 1,010,979 352,622 658,357 156,931 15.5%
Midwest ................ 882,924 248,222 634,702 124,203 14.1%
Central Plains ......... 411,666 88,168 323,498 46,195 11.2%
Texas .................. 465,835 150,987 314,848 84,942 18.2%
Southwest .............. 322,438 48,459 273,979 45,483 14.1%
Northwest .............. 347,710 99,896 247,814 47,862 13.8%
--------- ------- ------- ------- ----
Total ............... 5,331,948 1,471,651 3,860,297 752,816 14.1%
========= ========= ========= ======= ====
</TABLE>
- ------------
Total homes in territory, homes not passed by cable, and homes passed by cable
are based on estimates of primary residences by Claritas, Inc.
For the month ended January 31, 2000, on an actual basis, Pegasus added
17,974 gross subscriber additions and 5,530 net subscriber additions. At
January 31, 2000, Pegasus' total subscribers on an actual and pro forma basis
(without giving effect to the merger with Golden Sky) were 726,585 and 758,656,
respectively.
The Pegasus Retail Network
The Pegasus retail network is a network of over 2,500 independent
satellite, consumer electronics and other retailers serving rural areas. We
began the development of the Pegasus retail network in 1995 in order to
distribute DIRECTV in our original DIRECTV exclusive territories in New
England. We have expanded this network into 36 states as a result of our
acquisitions of DIRECTV rural affiliates since 1996. Today, the Pegasus retail
network is one of the few sales and distribution channels available to digital
satellite service providers seeking broad and effective distribution in rural
areas throughout the continental United States.
We believe that the national reach of the Pegasus retail network has
positioned us to:
o improve the penetration of DIRECTV in DIRECTV exclusive territories that
we now own or that we may acquire from other DIRECTV rural affiliates;
o assist DIRECTV in improving DIRECTV's direct broadcast satellite market
share in rural areas outside of the DIRECTV exclusive territories held by
DIRECTV rural affiliates; and
o offer providers of new digital satellite services, such as the soon to be
launched digital audio and broadband multimedia satellite services, an
effective and convenient means for reaching the approximately 30% of
America's population that live and work in rural areas.
Broadcast Television
Our operating strategy in broadcast television is focused on:
o developing strong local sales forces and sales management to maximize the
value of our stations' inventory of advertising spots;
o improving the stations' programming, promotion and technical facilities
in order to maximize their ratings in a cost-effective manner; and
o maintaining strict control over operating costs while motivating
employees through the use of incentive plans, which reward our employees
in proportion to annual increases in location cash flow.
We have purchased or launched TV stations affiliated with the "emerging
networks" of Fox, the WB and UPN, because, while affiliates of these networks
generally have lower revenue shares than stations affiliated with ABC, CBS and
NBC, we believe that they will experience growing audience ratings and
therefore afford us greater opportunities for increasing their revenue share.
We have entered into local marketing agreements in three of our existing
markets because they provide additional opportunities for increasing revenue
share with limited additional operating expenses. However, the FCC has recently
adopted rules which in most instances
89
<PAGE>
would prohibit us from expanding in our existing markets through local
marketing agreements and may require us to modify or terminate our existing
agreements. We have entered into local marketing agreements to program one
station as an affiliate of Fox, two stations as affiliates of the WB network
and one station as an affiliate of UPN. We plan to program an additional
station pursuant to a local marketing agreement in 2000, if permitted by the
FCC.
The following table sets forth general information for each of Pegasus'
stations.
<TABLE>
<CAPTION>
Station
Station Acquisition Date Affiliation Market Area DMA (1) Households (2)
- ----------------------------- ------------------ ------------- ----------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
WDBD-40 ..................... May 1993 Fox Jackson, MS 91 298,000
WDSI-61 ..................... May 1993 Fox Chattanooga, TN 82 332,000
WGFL-53 (3) ................. (3) WB Gainesville, FL 167 101,000
WOLF-56/WILF-53 (4) ......... May 1993 Fox Northeastern PA 47 566,000
WSWB-38 (4) ................. (4) WB Northeastern PA 47 566,000
WPXT-51 ..................... January 1996 Fox Portland, ME 79 353,000
WPME-35 (5) ................. (5) UPN Portland, ME 79 353,000
WTLH-49/WFXU (6) ............ March 1996 Fox Tallahassee, FL 116 221,000
</TABLE>
- ------------
(1) There are 211 designated market areas or designated market areas in the
United States with each county in the continental United States assigned
uniquely to one designated market area. Ranking of designated market are
is based upon Nielsen estimates of the number of television households.
(2) Represents total homes in a designated market area for each television
station as estimated by Broadcast Investment Analysts.
(3) Pegasus began programming WGFL in October 1997 pursuant to an local
marketing agreement as an affiliate of the WB network.
(4) WILF and WWLF until November 1998 had simulcast the programming of WOLF. In
November 1998, the station then known as WOLF (Channel 38) was sold to KB
Prime Media LLC. That station has changed its call letters to WSWB, and is
now programmed by Pegasus pursuant to an local marketing agreement as an
affiliate of the WB network. The station formerly know as WWLF changed its
call letters to WOLF, and simulcasts Fox programming on WILF.
(5) Pegasus began programming WPME in August 1997 pursuant to an local
marketing agreement as an affiliate of UPN.
(6) Pegasus programs WFXU pursuant to an local marketing agreement. WFXU has
simulcast the programming of WTLH since July 1998.
Cable Television
We own and operate a cable system serving areas of western, southwestern
and northwestern Puerto Rico. Our Puerto Rico cable system serves franchised
areas of approximately 170,000 households and serves approximately 55,000
subscribers.
We have entered into a letter of intent to sell the assets of our cable
system business in Puerto Rico to a subsidiary of Centennial Cellular
Corporation for $170.0 million in cash, subject to certain adjustments. The
sale of this cable system is subject to the negotiation of a definitive
agreement, third-party approvals, including regulatory approvals, and other
customary conditions. The sale is also subject to approval by our board of
directors. We cannot assure you that these conditions will be satisfied and
that the sale will be consummated.
90
<PAGE>
Recent Completed and Pending Transactions
Completed Transactions
Completed Direct Broadcast Satellite Acquisitions. From January 1, 2000
through February 15, 2000, we completed four acquisitions for DIRECTV
distribution rights in rural areas of California, Indiana, Illinois, Oregon and
South Dakota. In the aggregate, the consideration for the completed direct
broadcast satellite acquisitions was $13.5 million in cash, $22.5 million in
Series D junior converible participating preferred stock, $39.7 million in
Pegasus' Class A common stock, $200,000 in promissory notes and $381,000 in
assumed net liabilities. The territories covered by these transactions include
approximately 241,500 households, including approximately 12,100 seasonal
residences and 24,200 business locations and 34,000 subscribers. In January
2000, we completed an acquisition for DIRECTV distribution rights in rural
areas of Michigan that was effective December 14, 1999. In the aggregate, the
total consideration for this direct broadcast satellite acquisition was
$707,000 in cash, $5.7 million in Series B junior convertible participating
preferred stock, $315,000 in promissory notes and $61,000 in assumed net
liabilities. The territories covered by this transaction include approximately
27,700 households, including approximately 1,400 seasonal residences and 2,800
business locations and 3,700 subscribers.
Convertible Preferred Stock Offering. On January 25, 2000, Pegasus
completed an offering of $300.0 million in liquidation amount of its 61/2%
Series C convertible preferred stock. Each share of Series C convertible
preferred stock is convertible at any time into the number of whole shares of
our Class A common stock equal to the stated liquidation preference of $100 per
share divided by an initial conversion price of $127.50 per share, subject to
adjustment if certain events should occur. Pegasus may redeem the Series C
convertible preferred stock at any time beginning on February 1, 2003 at
redemption prices set forth in the certificate of designation. In addition,
from August 1, 2001 to February 1, 2003, Pegasus may redeem the Series C
convertible preferred stock at a redemption premium of 105.525% of the stated
liquidation preference, plus accumulated and unpaid dividends, if any, if the
trading price of Pegasus' Class A common stock equals or exceeds $191.25 for a
specified trading period. In the event of a change of control of Pegasus,
holders of Series C convertible preferred stock will have a one-time option to
convert such holder's shares into Class A common stock at a conversion price
equal to the greater of (1) the market price of our Class A common stock at the
change of control date or (2) $68.00 per share. In lieu of issuing Class A
common stock, we may, at our option, make a cash payment equal to the market
value of the shares. Pegasus plans to use the net proceeds of the offering for
working capital and general corporate purposes.
Investment in Personalized Media Communications, LLC and Licensing of
Patents. On January 13, 2000, Pegasus made an investment in Personalized Media
Communications, LLC, an advanced communications technology company. A
subsidiary of Personalized Media granted to Pegasus an exclusive license for
use of Personalized Media's patent portfolio in the distribution of satellite
services from specified orbital locations. Mary C. Metzger, Chairman of
Personalized Media and a member of Pegasus' board of directors, and John C.
Harvey, Managing Member of Personalized Media and Ms. Metzger's husband, own a
majority of and control Personalized Media.
Pegasus acquired preferred interests of Personalized Media for
approximately $14.3 million cash, 200,000 shares of Pegasus' Class A common
stock and Pegasus' agreement, subject to certain conditions, to issue warrants
to purchase 1.0 million shares of Pegasus' Class A common stock at an exercise
price of $90.00 per share and with a term of ten years. See Certain
Transactions.
Pegasus Media & Communications Credit Facility. On January 14, 2000,
Pegasus Media & Communications, Inc., a wholly-owned subsidiary of Pegasus,
entered into a $500.0 million credit facility. The new Pegasus Media &
Communications credit facility replaced the previous Pegasus Media &
Communications and Digital Television Services credit facilities. Pegasus Media
& Communications can use borrowings under the credit facility for acquisitions
and general corporate purposes. In connection with the closing of the new
Pegasus Media & Communications credit facility, Digital Television Services was
merged with and into a subsidiary of Pegasus Media & Communications.
Pending Transactions
Pending Direct Broadcast Satellite Acqusitions. As of February 15, 2000,
we have entered into letters of intent or definitive agreements to acquire
DIRECTV distribution rights in rural areas of four states. In the
91
<PAGE>
aggregate, the consideration for these pending direct broadcast satellite
acquisitions is $25.7 million in cash and $10.0 million in preferred stock. The
territories covered by the letters of intent or definitive agreements include
approximately 195,800 television households, including approximately 9,800
seasonal residences and 19,600 business locations and 16,700 subscribers. The
closings of these acquisitions are subject to negotiation of definitive
agreements, third-party approvals and other customary conditions. We cannot
assure you that these conditions will be satisfied.
Sale of Puerto Rico Cable System. We have entered into a letter of intent
to sell the assets of our cable system in Puerto Rico. See -- Cable Television.
Competition
Our direct broadcast satellite business faces competition from other
current or potential multichannel programming distributors, including other
direct broadcast satellite operators, direct-to-home providers, cable
operators, wireless cable operators, Internet and local and long-distance
telephone companies, which may be able to offer more competitive packages or
pricing than we or DIRECTV can provide. In addition, the direct broadcast
satellite industry is still evolving and recent or future competitive
developments could adversely affect us. For example, EchoStar, which competes
with us in the sale of direct broadcast satellite programming, has recently
increased its channel capacity such that EchoStar could now offer in excess of
500 channels, which exceeds the channel capacity DIRECTV currently offers. See
Business of Golden Sky -- Competition.
Our TV stations compete for audience share, programming and advertising
revenue with other television stations in their respective markets and with
direct broadcast satellite operators, cable operators and other advertising
media. direct broadcast satellite and cable operators in particular are
competing more aggressively than in the past for advertising revenues in our TV
stations' markets. This competition could adversely affect our stations'
revenues and performance in the future.
Our cable systems face competition from television stations, satellite
master antennae television systems, wireless cable systems, direct-to-home
providers, direct broadcast satellite systems and open video systems.
In addition, the markets in which we operate are in a constant state of
change due to technological, economic and regulatory developments. We are
unable to predict what forms of competition will develop in the future, the
extent of such competition or its possible effects on our businesses.
Employees
As of December 31, 1999, we had 1,006 full-time and 347 part-time
employees. We also had 8 general managers, 48 department managers and 12
corporate managers as of this date. We are not a party to any collective
bargaining agreements, and we consider our relations with our employees to be
good.
Direct Broadcast Satellite Agreements, Licenses, Local Marketing Agreements and
Cable Franchises
Direct Broadcast Satellite Agreements
Prior to the launch of the first DIRECTV satellite in 1993, Hughes entered
into various agreements intended to assist it in the introduction of DIRECTV
services, including agreements with RCA/Thomson for the development and
manufacture of direct broadcast satellite reception equipment and with USSB for
the sale of five transponders on the first satellite. In an agreement concluded
in 1994, Hughes offered members and associates of the National Rural
Telecommunications Cooperative the opportunity to become the exclusive
providers of certain direct broadcast satellite services using the DIRECTV
satellite of the 101- W orbital location, generally including DIRECTV
programming, to specified residences and commercial subscribers in rural areas
of the U.S. The National Rural Telecommunications Cooperative is a cooperative
organization whose members and associates are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the U.S.
National Rural Telecommunications Cooperative members and associates that
participated in its direct broadcast satellite program acquired the rights to
provide the direct broadcast
92
<PAGE>
satellite services described above in their service areas. The service areas
purchased by participating National Rural Telecommunications Cooperative
members and associates comprise approximately 9.0 million television households
and were initially acquired for aggregate commitment payments exceeding $100
million.
The agreement between Hughes (and DIRECTV as its successor) and National
Rural Telecommunications Cooperative, and related agreements between the
National Rural Telecommunications Cooperative and its participating members and
associates, provide those members and associates with substantial rights and
benefits from distribution in their service areas of the direct broadcast
satellite services, including the right to set pricing, to retain all
subscription remittances and to appoint sales agents. In exchange for such
rights and benefits, the participating members and associates made substantial
commitment payments to DIRECTV. In addition, the participating members and
associates are required to reimburse DIRECTV for their allocable shares of
certain common expenses, such as programming, satellite-specific costs and
expenses associated with the billing and authorization systems, and to remit to
DIRECTV a 5% fee on subscription revenues.
DIRECTV has disputed the extent of the rights held by the participating
National Rural Telecommunications Cooperative members and associates. See
- -- Legal Proceedings. Those disputes include the rights asserted by
participating members and associates:
o to provide all services offered by DIRECTV that are transmitted over 27
frequencies that the FCC has authorized for DIRECTV's use for a term
running through the life of DIRECTV's satellites at the 101(degree) W
orbital location;
o to provide certain other services over the DIRECTV satellites; and
o to have the National Rural Telecommunications Cooperative exercise a
right of first refusal to acquire comparable rights in the event that
DIRECTV elects to launch successor satellites upon the removal of the
DIRECTV satellites from their orbital location at the end of their lives.
The financial terms of the right of first refusal are likely to be the
subject of negotiation and Pegasus is unable to predict whether substantial
additional expenditures by the National Rural Telecommunications Cooperative
will be required in connection with the exercise of such right of first
refusal.
The agreements between the National Rural Telecommunications Cooperative
and participating National Rural Telecommunications Cooperative members and
associates terminate when the DIRECTV satellites are removed from their orbital
location at the end of their lives. If the satellites are removed earlier than
June 2004, the tenth anniversary of the commencement of DIRECTV services,
Pegasus will receive a prorated refund of its original purchase price for the
DIRECTV rights. Our agreements with the National Rural Telecommunications
Cooperative may be terminated prior to the expiration of its term as follows:
o If the agreement between DIRECTV and the National Rural
Telecommunications Cooperative is terminated because of a breach by
DIRECTV, the National Rural Telecommunications Cooperative may terminate
its agreements with us, but the National Rural Telecommunications
Cooperative will be responsible for paying to us our pro rata portion of
any refunds that the National Rural Telecommunications Cooperative
receives from DIRECTV.
o If we fail to make any payment due to the National Rural
Telecommunications Cooperative or otherwise breach a material obligation
of our agreements with the National Rural Telecommunications Cooperative,
the National Rural Telecommunications Cooperative may terminate our
agreement with the National Rural Telecommunications Cooperative in
addition to exercising other rights and remedies against us.
o If the National Rural Telecommunications Cooperative's agreement with
DIRECTV is terminated because of a breach by the National Rural
Telecommunications Cooperative, DIRECTV is obligated to continue to
provide DIRECTV services to Pegasus by assuming the National Rural
Telecommunications Cooperative's rights and obligations under the National
Rural Telecommunications Cooperative's agreement with DIRECTV or under a
new agreement containing substantially the same terms and conditions as
National Rural Telecommunications Cooperative's agreement with DIRECTV.
93
<PAGE>
We are not permitted under our agreements with the National Rural
Telecommunications Cooperative to assign or transfer, directly or indirectly,
our rights under these agreements without the prior written consent of the
National Rural Telecommunications Cooperative and DIRECTV, which consents
cannot be unreasonably withheld.
The National Rural Telecommunications Cooperative has adopted a policy
requiring any party acquiring DIRECTV distribution rights from a National Rural
Telecommunications Cooperative member or associate to post a letter of credit
to secure payment of National Rural Telecommunications Cooperative's billings
if the acquiring person's monthly payments to the National Rural
Telecommunications Cooperative, including payments on account of the acquired
territory, exceeds a specified amount. Pursuant to this policy, Pegasus or its
subsidiaries have posted letters of credit of approximately $23.7 million in
connection with completed direct broadcast satellite acquisitions. Although
this requirement can be expected to reduce somewhat our acquisition capacity
inasmuch as it ties up capital that could otherwise be used to make
acquisitions, we expect this reduction to be manageable. There can be no
assurance, however, that the National Rural Telecommunications Cooperative will
not in the future seek to institute other policies, or to change this policy,
in ways that would be material to us.
Broadcast Television
FCC Licensing. The broadcast television industry is subject to regulation
by the FCC pursuant to the Communications Act of 1934, as amended. Approval by
the FCC is required for the issuance, renewal, transfer and assignment of
broadcast station operating licenses. Television license terms are generally
eight years. While in the vast majority of cases such licenses are renewed by
the FCC, there can be no assurance that our licenses or the licenses for the TV
stations that we program pursuant to local marketing agreements will be renewed
at their expiration dates or that such renewals will be for full terms. The
licenses with respect to TV stations WOLF/WILF, WPXT, WDSI, WTLH and WDBD are
scheduled to expire on August 1, 2007, April 1, 2007, August 1, 2005, April 1,
2005, and June 1, 2005, respectively. The licenses with respect to WSWB, WFXU
and WGFL, stations we program pursuant to local marketing agreements, expire on
August 1, 2007, February 1, 2005 and February 1, 2005, respectively. The other
TV station we program, WPME, has a license application pending at the FCC.
There can be no assurance this license application will be granted.
Fox Affiliation Agreement. Our network affiliation agreements with the Fox
Broadcasting Company formally expired on January 30, 1999, except for the
affiliation agreement for television station WTLH, which is scheduled to expire
on December 31, 2000. Except in the case of WTLH, we currently broadcast Fox
programming under arrangements between Pegasus and Fox which have generally
conformed in practice to such affiliation agreements. Negotiations with Fox are
continuing, and we believe that we will enter into new affiliation agreements
on satisfactory terms with no disruption in programming. If we are mistaken in
this belief, the loss of the ability to carry Fox programming could have a
material and adverse effect on our broadcast television operations.
The station affiliation agreement with Fox for WTLH provides WTLH with the
right to broadcast programming which Fox and Fox Children's Network, Inc. make
available for broadcasting in Tallahassee, Florida, the community to which WTLH
is licensed by the FCC. Fox has committed to supply approximately six hours of
programming each weekday, although, from time to time, some Fox time periods
have been available to the station for programming. On weekends, Fox generally
supplies more programming than during the week, including sports programming
such as National Football Conference games and pre-game shows. WTLH has agreed
to broadcast all such Fox programs in their entirety, including all commercial
announcements. In each Fox program, WTLH may sell the advertising time
generally made available by Fox in such program to its affiliates on a national
basis, and, generally, may retain the revenues from such sales. Fox retains the
right to sell the remaining advertising time in each Fox program. WOLF, WPXT,
WDSI and WDBD have also operated under substantially the same terms and
conditions.
Under its station affiliation agreement with Fox, WTLH is entitled to
receive payments from Fox Kids Worldwide, Inc. as compensation for
relinquishing its former interests in the profits of Fox Children's Network and
for continuing to carry Fox Children's Network programming on the station.
Those payments, together with certain revenues from commercials and from
retransmission arrangements with Fox, will be
94
<PAGE>
returned to Fox to defray the costs of providing NFL programming to the
station. Under specified circumstances, however, Fox or WTLH may cancel the
arrangements for broadcast of NFL programming, in which case the Fox Children's
Network-related compensation would thereafter be paid to the station. In the
event that WTLH ceases to carry Fox Children's Network programming prior to
June 30, 2008, after having receiving NFL programming, Fox may have a claim for
amounts under the terms of the station affiliation agreement.
WTLH's station affiliation agreement with Fox expires December 31, 2000,
but is renewable for two successive two-year periods, at the discretion of Fox
and upon acceptance by Pegasus. Fox may terminate the station affiliation
agreement upon:
o a change in any material aspect of the station's operation, including its
transmitter location, power, frequency, programming format or hours of
operation, with 30 days written notice;
o acquisition by Fox, directly or indirectly, of a significant ownership
and/or controlling interest in any television station in the same market,
with 60 days written notice;
o assignment or attempted assignment by Pegasus of the station affiliation
agreement, with 30 days written notice;
o three or more unauthorized preemptions of Fox programming within a
12-month period, with 30 days written notice; or
o WTLH deciding not to accept a change in Fox operations applicable to Fox
affiliates generally.
Either Fox or WTLH may terminate the station affiliation agreement upon
occurrence of a force majeure event which substantially interrupts Fox's
ability to provide programming or the station's ability to broadcast the
programming.
UPN Affiliation Agreement. The Portland TV station programmed by Pegasus
pursuant to a local marketing agreement, WPME, is affiliated with UPN pursuant
to a station affiliation agreement. Under the station affiliation agreement
with UPN, UPN grants Pegasus an exclusive license to broadcast all programming,
including commercial announcements, network identifications, promotions and
credits, which UPN makes available to serve the community of Lewiston, Maine.
UPN has committed to supply approximately four hours of programming during
specified time periods. The station affiliation agreement with UPN allots to
each party a specified amount of advertising time during each hour of
programming, and each party is entitled to the revenue realized from its sale
of advertising time.
The term of the station affiliation agreement with UPN expires January 15,
2001, and automatically renews for a three-year period unless either party has
given written notice to the other party of its election not to renew. UPN may
terminate the station affiliation agreement upon prior written notice in the
event of:
o a material reduction or modification of WPME's transmitter location,
power, frequency, programming format or hours of operation;
o any assignment or transfer of control of the station's license; or
o three or more unauthorized preemptions of UPN programming by the station
during any 12-month period, which have actually occurred or which UPN
reasonably believes will occur.
Either UPN or Pegasus may terminate the station affiliation agreement upon the
occurrence of a force majeure event that causes UPN substantially to fail to
provide programming or Pegasus substantially to fail to broadcast UPN's
programming, for either four consecutive weeks or an aggregate of six weeks in
any 12-month period.
WB Affiliation Agreements. We program TV stations WSWB and WGFL as
affiliates of WB and are in the process of negotiating affiliation agreements
with respect to these stations.
Local Marketing Agreements. In the past, the FCC rules precluded the
ownership of more than one television station in a market, unless such stations
were operated as a satellite of a primary station. In recent years, in a number
of markets across the country, certain television owners entered into
agreements to provide
95
<PAGE>
the bulk of the broadcast programming on stations owned by other licensees, and
to retain the advertising revenues generated from such programming. Such
agreements are commonly referred to as local marketing agreements. Local
marketing agreements were not considered attributable interests under the FCC's
old multiple ownership rules.
In August 1999, the FCC revised its attribution and multiple ownership
rules. The new rules generally provide that television local marketing
agreements are attributable if the programmer owns a station in the same market
as the station it is programming pursuant to a local marketing agreement. Local
marketing agreements entered into on or after November 5, 1996 must comply with
the new ownership rules by August 5, 2001 or such local marketing agreements
will terminate. Local marketing agreements entered into before November 5,
1996, will be grandfathered until the conclusion of the FCC's 2004 biennial
review. The new rules also generally allow one entity to own two television
stations in the same market if there would be eight full-power commercial and
non-commercial television stations in the market after the combination, or if
the acquired station is economically distressed and could not be built or
operated without combining with another station in the market. In certain
cases, parties with grandfathered local marketing agreements may rely on the
circumstances at the time the local marketing agreement was entered into in
advancing any proposal for co-ownership of the stations. The markets in which
Pegasus programs a second station pursuant to a local marketing agreement do
not have eight full-power commercial and non-commercial television stations.
Pegasus has not yet filed any application to acquire any of the stations with
which it has local marketing agreements based on a showing of economic
distress, and cannot predict the outcome of such a filing should one be made.
Pegasus' local marketing agreements with WSWB and WFXU were entered into after
November 5, 1996. The local marketing agreement with WPME was entered into
prior to November 5, 1996. The local marketing agreement with WGFL was entered
into after November 5, 1996. However, Pegasus does not own other stations in
the WGFL market, and thus the WGFL local marketing agreement is not currently
affected by these changes. Petitions for reconsideration of the new rules,
including a petition submitted by Pegasus, are currently pending before the
FCC. We cannot predict the outcome of these petitions.
When operating pursuant to a local marketing agreement, while the bulk of
the programming is provided by someone other than the licensee of the station,
the station licensee must retain control of the station for FCC purposes. Thus,
the licensee has the ultimate responsibility for the programming broadcast on
the station and for the station's compliance with all FCC rules, regulations,
and policies. The licensee must retain the right to preempt programming
supplied pursuant to the local marketing agreement where the licensee
determines, in its sole discretion, that the programming does not promote the
public interest or where the licensee believes that the substitution of other
programming would better serve the public interest. The licensee must also have
the primary operational control over the transmission facilities of the
station.
Pegasus programs WPME (Portland, Maine), WGFL (Gainesville, Florida), WSWB
(Northeastern Pennsylvania), and WFXU (Tallahassee, Florida) through the use of
local marketing agreements, but there can be no assurance that the licensees of
such stations will not unreasonably exercise their right to preempt the
programming of Pegasus, or that the licensees of such stations will continue to
maintain the transmission facilities of the stations in a manner sufficient to
broadcast a high quality signal over the station. As the licensee must also
maintain all of the qualifications necessary to be a licensee of the FCC, and
as the principals of the licensee are not under the control of Pegasus, there
can be no assurances that these licenses will be maintained by the entities
which currently hold them.
Cable Franchises
Cable systems are generally constructed and operated under non-exclusive
franchises granted by state or local governmental authorities. The franchise
agreements may contain many conditions, such as the payment of franchise fees;
time limitations on commencement and completion of construction; conditions of
service, including the number of channels, the carriage of public, educational
and governmental access channels, the carriage of broad categories of
programming agreed to by the cable operator, and the provision of free service
to schools and certain other public institutions; and the maintenance of
insurance and indemnity bonds. Certain provisions of local franchises are
subject to limitations under the Cable Television Consumer Protection and
Competition Act of 1992.
96
<PAGE>
Pegasus holds four cable franchises, all of which are non-exclusive. Our cable
franchises have terms that expire in 2003, 2004, 2008 and 2009. We have never
had a franchise revoked. All of the franchises of the systems eligible for
renewal have been renewed or extended at or prior to their stated expirations.
The Communications Act provides, among other things, for an orderly
franchise renewal process in which renewal will not be unreasonably withheld.
In addition, the Communications Act establishes comprehensive renewal
procedures which require that an incumbent franchisee's renewal application be
assessed on its own merit and not as part of a comparative process with
competing applications. We believe that we have good relations with our
franchising authorities. The Communications Act prohibits franchising
authorities from imposing annual franchise fees in excess of 5% of gross
revenues and permits the cable system operator to seek renegotiations and
modification of franchise requirements if warranted by changed circumstances.
Legislation and Regulation
In February 1996, Congress passed the Telecommunications Act, which
substantially amended the Communications Act. This Act has altered and will
continue to alter federal, state and local laws and regulations regarding
telecommunications providers and services, including Pegasus and the cable
television and other telecommunications services provided by Pegasus.
On November 29, 1999, Congress enacted the Satellite Home Viewer
Improvement Act of 1999, which amended the Satellite Home Viewer Act. This Act,
for the first time, permits direct broadcast satellite operators to transmit
local television signals into local markets. In other important statutory
amendments of significance to satellite carriers and television broadcasters,
the law generally seeks to place satellite operators on an equal footing with
cable television operators as regards the availability of television broadcast
programming.
Direct Broadcast Satellite
Unlike a common carrier, such as a telephone company, or a cable operator,
direct broadcast satellite operators such as DIRECTV are free to set prices and
serve customers according to their business judgment, without rate of return or
other regulation or the obligation not to discriminate among customers.
However, there are laws and regulations that affect DIRECTV and, therefore,
affect Pegasus. As an operator of a privately owned U.S. satellite system,
DIRECTV is subject to the regulatory jurisdiction of the FCC, primarily with
respect to:
o the licensing of individual satellites (i.e., the requirement that
DIRECTV meet minimum financial, legal and technical standards);
o avoidance of interference with radio stations; and
o compliance with rules that the FCC has established specifically for
direct broadcast satellite licenses.
As a distributor of television programming, DIRECTV is also affected by
numerous other laws and regulations. The Telecommunications Act clarifies that
the FCC has exclusive jurisdiction over direct-to-home satellite services and
that criminal penalties may be imposed for piracy of direct-to-home satellite
services. The Telecommunications Act also offers direct-to-home operators
relief from private and local government-imposed restrictions on the placement
of receiving antennae. In some instances, direct-to-home operators have been
unable to serve areas due to laws, zoning ordinances, homeowner association
rules, or restrictive property covenants banning the installation of antennae
on or near homes. The FCC has promulgated rules designed to implement Congress'
intent by prohibiting any restriction, including zoning, land use or building
regulation, or any private covenant, homeowners' association rule, or similar
restriction on property within the exclusive use or control of the antenna user
where the user has a direct or indirect ownership interest in the property, to
the extent it impairs the installation, maintenance or use of a direct
broadcast satellite receiving antenna that is one meter or less in diameter or
diagonal measurement, except where such restriction is necessary to accomplish
a clearly defined safety objective or to preserve a recognized historic
district. Local governments and associations may apply to the FCC for a waiver
of this rule based on local concerns of a highly specialized or unusual nature.
The FCC also issued a further order giving renters the right to install
antennas in areas of their rental property in which they have exclusive use,
e.g. balconies or
97
<PAGE>
patios. The Telecommunications Act also preempted local (but not state)
governments from imposing taxes or fees on direct-to-home services, including
direct broadcast satellite. Finally, the Telecommunications Act required that
multichannel video programming distributors such as direct-to-home operators
fully scramble or block channels providing indecent or sexually explicit adult
programming. If a multichannel video programming distributor could not fully
scramble or block such programming, it was required to restrict transmission to
those hours of the day when children are unlikely to view the programming (as
determined by the FCC). On March 24, 1997, the U.S. Supreme Court let stand a
lower court ruling that allowed enforcement of this provision pending a
constitutional challenge. In response to this ruling, the FCC declared that its
rules implementing the scrambling provision would become effective on May 18,
1997. On December 28, 1998, the requirement to scramble sexually explicit
programming was ruled unconstitutional by the U.S. District Court in
Wilmington, Delaware, and the decision was appealed to the U.S. Supreme Court.
In addition to regulating pricing practices and competition within the
franchise cable television industry, the Communications Act is intended to
establish and support existing and new multi-channel video services, such as
wireless cable and direct-to-home, to provide subscription television services.
DIRECTV and Pegasus have benefited from the programming access provisions of
the Communications Act and implementing rules in that DIRECTV has been able to
gain access to previously unavailable programming services and, in some
circumstances, has obtained certain programming services at reduced cost. Any
amendment to, or interpretation of, the Communications Act or the FCC's rules
that would permit cable companies or entities affiliated with cable companies
to discriminate against competitors such as DIRECTV in making programming
available (or to discriminate in the terms and conditions of such programming)
could adversely affect DIRECTV's ability to acquire programming on a
cost-effective basis, which would have an adverse impact on Pegasus. Certain of
the restrictions on cable-affiliated programmers will expire in 2002 unless the
FCC extends such restrictions.
The FCC has completed a rulemaking imposing public interest requirements
for providing video programming on direct-to-home licensees, including, at a
minimum, reasonable and non-discriminatory access by qualified federal
candidates for office at the lowest unit rates and the obligation to set aside
four percent of the licensee's channel capacity for non-commercial programming
of an educational or informational nature. Within this set-aside requirement,
direct-to-home providers must make capacity available to "national educational
programming suppliers" at rates not exceeding 50% of the direct-to-home
provider's direct costs of making the capacity available to the programmer.
The Satellite Home Viewer Act, as modified by the Satellite Home Viewer
Improvement Act of 1999 establishes a "statutory" copyright license that allows
a direct-to-home satellite operator to retransmit three types of television
broadcast programming to subscribers for private home viewing:
o network programming so long as any such retransmission is limited to
those persons in "unserved households;"
o independent station ("superstation") programming, regardless of whether
households are "served or "unserved," as long as any such retransmission
qualifies as a "distant" signal; and
o any local broadcast signal so long as it is retransmitted locally
("local to local").
Retransmission of the first two types of signals is subjected to a statutory
established mechanism for the calculation and payment of copyright royalty
fees; these provisions will remain in effect until December 31, 2004. The third
type of signal is royalty-free; this statutory provision is permanent.
In addition to explicit statutory requirements, and administrative
responsibilities in the U.S. Copyright Office, the Satellite Home Viewer
Improvement Act requires the FCC to engage in numerous regulatory activities,
all to be completed on or before November 29, 2000.
The FCC has issued a notice of proposed rulemaking concerning
retransmission consent issues. Among other things, the Satellite Home Viewer
Improvement Act requires broadcasters, until 2006, to negotiate in "good
faith," with satellite carriers and other multi-channel video program
distributors regarding the carriers' retransmission of the broadcasters'
signals. The FCC has sought comments on the "good faith" negotiation
requirement and other key aspects of retransmission consent, including aspects
already promulgated pursuant to the Communications Act.
98
<PAGE>
The FCC has also issued a notice of proposed rulemaking seeking comments
on the implementation of regulations that would apply current cable rules for
network non-duplication, syndicated program exclusivity and sports blackout to
satellite carriers. These three rules have been in existence for many years and
involve television broadcast programs that are retransmitted by cable
operators. The Satellite Home Viewer Improvement Act directs the FCC to apply
these rules to satellite carriers' retransmission of superstations. In
addition, the FCC is directed to apply the sports blackout rule to carriers'
retransmission of network stations as well, but only "to the extent technically
feasible and not economically prohibitive."
The FCC is also seeking public comments on rules to improve the computer
model that predicts signal intensity at a household for the purpose of
determining eligibility for receiving distant television broadcast signals via
satellite. The determination about whether a household is "unserved" -- that
is, cannot receive a signal of Grade B intensity using a conventional outdoor
TV antenna -- is an important one because only these households may receive
distant network to distant network television signals.
The Satellite Home Viewer Improvement Act requires direct-to-home
satellite carriers by January 1, 2002, to carry upon request all local
broadcast stations' signals in local markets in which the carriers carry at
least one signal pursuant to the "local to local" statutory license. In a
future rulemaking, the FCC will promulgate "must carry" rules on satellite
carriers similar to those imposed on cable systems. The lengthy transition
period for "must carry" is expected to place satellite carriers in a comparable
position to cable operators.
The final outcome of ongoing and future FCC rulemakings cannot yet be
determined. Any regulatory changes could adversely affect Pegasus' operations.
Must carry requirements could cause the displacement of possibly more
attractive programming. See Risk Factors -- Risks of Our Direct Broadcast
Satellite Business -- The Effect of New Federal Satellite Television
Legislation on Our Business is Unclear.
The foregoing does not purport to describe all present and proposed
federal regulations and legislation relating to the direct broadcast satellite
industry.
Broadcast Television
The ownership, operation and sale of television stations, including those
licensed to our subsidiaries, are subject to the jurisdiction of the FCC under
authority granted it pursuant to the Communications Act. Matters subject to FCC
oversight include, but are not limited to,
o the assignment of frequency bands for broadcast television;
o the approval of a television station's frequency, location and
operating power;
o the issuance, renewal, revocation or modification of a television
station's FCC license;
o the approval of changes in the ownership or control of a television
station's licensee;
o the regulation of equipment used by television stations; and
o the adoption and implementation of regulations and policies concerning
the ownership, operation and employment practices of television
stations.
The FCC has the power to impose penalties, including fines or license
revocations, upon a licensee of a television station for violations of the
FCC's rules and regulations. The following is a brief summary of certain
provisions of the Communications Act and of specific FCC regulations and
policies affecting broadcast television. Reference should be made to the
Communications Act, FCC rules and the public notices and rulings of the FCC for
further information concerning the nature and extent of FCC regulation of
broadcast television stations.
License Renewal. Television station licenses are granted for a maximum
allowable period of eight years and are renewable thereafter for additional
eight year periods. The FCC may revoke or deny licenses, after a hearing, for
serious violations of its regulations, and it may impose fines on licensees for
less serious infractions. Petitions to deny renewal of a license may be filed
on or before the first day of the last month of a license term. Generally,
however, in the absence of serious violations of FCC rules or policies, license
99
<PAGE>
renewal is expected in the ordinary course. The FCC will grant a license
renewal if the FCC finds that the station seeking renewal has served the public
interest, convenience and necessity, that there have been no serious violations
by the licensee of the Communications Act or the rules and regulations of the
FCC, and that there have been no other violations by the licensee of the
Communications Act or the rules and regulations of the FCC that, when taken
together, would constitute a pattern of abuse. The licenses with respect to TV
stations WOLF/WILF, WPXT, WDSI, WTLH and WDBD are scheduled to expire on August
1, 2007, April 1, 2007, August 1, 2005, April 1, 2005 and June 1, 2005,
respectively. The licenses with respect to WSWB, WFXU and WGFL, stations
Pegasus programs pursuant to local marketing agreements, expire on August 1,
2007, February 1, 2005 and February 1, 2005, respectively. The other television
station Pegasus programs, WPME, has a license application pending at the FCC.
Ownership Matters. The Communications Act contains a number of
restrictions on the ownership and control of broadcast licenses. The
Communications Act prohibits the assignment of a broadcast license or the
transfer of control of a broadcast licensee without the prior approval of the
FCC. The Communications Act and the FCC's rules also place limitations on alien
ownership; common ownership of broadcast, cable and newspaper properties;
ownership by those not having the requisite "character" qualifications and
those persons holding "attributable" interests in the licensee.
Attribution Rules. The FCC generally applies its ownership limits to
"attributable" interests held by an individual, corporation, partnership or
other association. In the case of corporations holding, or through subsidiaries
controlling, broadcast licenses, the interests of officers, directors and those
who, directly or indirectly, have the right to vote 5% or more of the
corporation's stock (or 20% or more of such stock in the case of insurance
companies, investment companies and bank trust departments that are passive
investors) are generally attributable, except that, in general, no minority
voting stock interest will be attributable if there is a single holder of more
than 50% of the outstanding voting power of the corporation.
The FCC recently adopted a new rule, known as the equity-debt plus rule,
that causes certain creditors or investors to be attributable owners of a
station, regardless of whether there is a single majority stockholder or other
applicable exception to the FCC's attribution rules. Under this new rule, a
major programming supplier -- any programming supplier that provides more than
15% of the station's weekly programming hours -- or same-market media entity
will be an attributable owner of a station if the supplier or same-market media
entity holds debt or equity, or both, in the station that is greater than 33%
of the value of the station's total debt plus equity. For purposes of this
rule, equity includes all stock, whether voting or nonvoting, and equity held
by insulated limited partners in a limited partnership. Debt includes all
liabilities, whether long-term or short-term.
Alien Ownership Restrictions. The Communications Act restricts the ability
of foreign entities to own or hold interests in broadcast licenses. Foreign
governments, representatives of foreign governments, non-citizens and
representatives of non-citizens, corporations and partnerships organized under
the laws of a foreign nation are barred from holding broadcast licenses.
Non-citizens, foreign governments, foreign corporations and representatives of
any of the foregoing, collectively, may directly or indirectly own or vote up
to 20% of the capital stock of a broadcast licensee. In addition, a broadcast
license may not be granted to or held by any corporation that is controlled,
directly or indirectly, by any other corporation more than one-fourth of whose
capital stock is owned or voted by non-citizens or their representatives, by
foreign governments or their representatives, or by non-U.S. corporations, if
the FCC finds that the public interest will be served by the refusal or the
revocation of such license. The FCC has interpreted this provision of the
Communications Act to require an affirmative public interest finding before a
broadcast license may be granted to or held by any such corporation. Because of
these provisions, we may be prohibited from having more than one-fourth of our
stock owned or voted directly or indirectly by non-citizens, foreign
governments, foreign corporations or representatives of any of the foregoing.
Multiple Ownership Rules. FCC rules limit the number of television
stations any one entity can acquire or own. The FCC's television national
multiple ownership rule limits the combined audience of television stations in
which an entity may hold an attributable interest to 35% of total U.S. audience
reach. Under the FCC's new local television ownership rules, a party may own
two television stations in a market if:
100
<PAGE>
o there is no Grade B overlap between the stations;
o if the stations are in two different Nielsen designated market areas;
or
o if the market containing both stations contains at least eight
separately-owned full-power television stations, and both stations are
not among the top four rated stations in the market.
In addition, a party may request a waiver of the rule to acquire a second
station in the market if the station to be acquired is economically distressed
or unbuilt and there is no party who does not own a local television station
who would purchase the station for a reasonable price.
Cross-Ownership Rules. The FCC's cross-ownership rules generally permit a
party to own a combination of up to two television stations and six radio
stations depending on the number of other, independent media voices in the
market. A "media voice" includes each independently owned and operating full
power television station, each independently owned and operating radio station,
and each independently owned daily newspaper with a circulation exceeding 5% of
the households in the market. In addition, all cable systems operating in the
market are counted as one voice. In addition, the Telecommunications Act
eliminates the statutory prohibition against the ownership of television
stations and cable systems in the same geographic market, although FCC rules
prohibiting such ownership are still in place.
Programming and Operation. The Communications Act requires broadcasters to
serve the "public interest." Broadcast station licensees are required to
present programming that is responsive to local community problems, needs and
interests and to maintain certain records demonstrating such responsiveness.
Complaints from viewers concerning a station's programming often will be
considered by the FCC when it evaluates license renewal applications, although
such complaints may be filed at any time and generally may be considered by the
FCC at any time. The FCC has initiated a proceeding to clarify the public
interest obligations of broadcasters, although we cannot predict the outcome of
such proceeding. Stations also must follow various FCC rules that regulate,
among other things, political advertising, sponsorship identifications, the
advertisements of contests and lotteries, programming directed to children,
obscene and indecent broadcasts, television violence, closed captioning and
technical operations, including limits on radio frequency radiation. The FCC
recently adopted rules to require broadcast licensees to create equal
employment opportunity outreach programs and maintain records and make filings
with the FCC evidencing such efforts.
Must Carry and Retransmission Consent. The Communications Act requires
each television broadcaster to make an election to exercise either certain
"must carry" or, alternatively, "retransmission consent" rights in connection
with its carriage by cable systems in the station's local market. If a
broadcaster chooses to exercise its must carry rights, it may demand carriage
on a specified channel on cable systems within its defined market. Must carry
rights are not absolute, and their exercise is dependent on variables such as
the number of activated channels on, and the location and size of, the cable
system and the amount of duplicative programming on a broadcast station. Under
certain circumstances, a cable system may decline carriage of a given station.
If a broadcaster chooses to exercise its retransmission consent rights, it may
prohibit cable systems from carrying its signal, or permit carriage under a
negotiated compensation arrangement. The FCC's must carry requirements took
effect in June 1993. Pegasus' stations exercised retransmission consent rights
in 1993 and 1996 and either elected retransmission consent or must carry in
1999. Television stations must make a new election between must carry and
retransmission consent rights every three years. The next required election
date is October 1, 2002.
The FCC has initiated a rulemaking proceeding to consider whether to apply
the must-carry rules to require cable companies to carry both the analog and
the digital signals of local broadcasters when television stations will be
broadcasting both signals, during the digital television transition period
between 2002 (at the latest) and 2006. If the FCC does not require digital
television must-carry, cable customers in our broadcast markets may not receive
the station's digital signal, which could adversely affect us.
Digital Television. The FCC has taken a number of steps to implement
digital television broadcasting service in the U.S. In December 1996, the FCC
adopted a digital television broadcast standard and has since adopted decisions
in several pending rulemaking proceedings that establish service rules and a
plan for implementing digital television. The FCC adopted a digital television
table of allotments that provides all
101
<PAGE>
television stations authorized as of April 1997 with a second channel on which
to broadcast a digital television signal. The FCC has attempted to provide
digital television coverage areas that are comparable to stations' existing
service areas. The FCC has ruled that television broadcast licensees may use
their digital channels for a wide variety of services such as high-definition
television, multiple standard definition television programming, audio, data,
and other types of communications, subject to the requirement that each
broadcaster provide at least one free video channel equal in quality to the
current technical standard and further subject to the requirement that
broadcast licensees pay a fee of 5% of gross revenues on all digital television
subscription services.
The FCC required that affiliates of ABC, CBS, Fox and NBC in the top ten
television markets begin digital broadcasting by May 1, 1999, and that
affiliates of these networks in markets 11 through 30 begin digital
broadcasting by November 1999. All other commercial stations are required to
begin digital broadcasting by May 1, 2002. The FCC's plan calls for the digital
television transition period to end in the year 2006 at which time the FCC
expects that television broadcasters will have ceased broadcasting on their
non-digital channels, allowing that spectrum to be recovered by the government
for other uses. Under the Balanced Budget Act signed into law by President
Clinton, however, the FCC is authorized to extend the December 31, 2006
deadline for reclamation of a television station's non-digital channel if, in
any given case:
o one or more television stations affiliated with one of the four major
networks in a market are not broadcasting digitally, and the FCC
determines that the station(s) has (have) "exercised due diligence" in
attempting to convert to digital broadcasting;
o less than 85% of the television households in the station's market
subscribe to a multichannel video service (cable, wireless cable or direct
broadcast satellite) that carries at least one digital channel from each
of the local stations in that market; or
o less than 85% of the television households in the station's market can
receive digital signals off the air using either a set-top converter box
for an analog television set or a new digital television set.
The Balanced Budget Act also directs the FCC to auction the non-digital
channels by September 30, 2002 even though they are not to be reclaimed by the
government until at least December 31, 2006. The Balanced Budget Act also
permits broadcasters to bid on the non-digital channels in cities with
populations greater than 400,000 provided the channels are used for digital
television. The FCC has opened separate proceedings to consider the surrender
of existing television channels and how those frequencies will be used after
they are eventually recovered from television broadcasters and to what extent
the cable must-carry requirements will apply to digital television signals.
In addition, the digital order restricts current stations' abilities to
relocate transmitter sites and otherwise change technical facilities in any
manner that could impact proposed digital television stations. This may
preclude the improvement of the facilities of certain stations owned or
programmed by Pegasus. The order also allotted digital television stations at
the current analog transmitter sites. Changes in the location of digital
stations are dependent on the lack of interference to other digital and analog
stations. Pegasus has filed applications with the FCC for digital television
construction permits for all of its stations.
Implementation of digital television will improve the technical quality of
television signals receivable by viewers. Under certain circumstances, however,
conversion to digital operation may reduce a station's geographic coverage area
or result in some increased interference. The FCC's digital television
allotment plan also results in current UHF stations having considerably less
signal power within their service areas than present VHF stations that move to
digital television channels. While the 1998 orders of the FCC present current
UHF stations with some options to overcome this power disparity, it is unknown
at this time whether Pegasus will be able to benefit from these options.
Implementation of digital television will also impose substantial additional
costs on television stations because of the need to replace equipment and
because some stations will need to operate at higher utility costs. The FCC has
also proposed imposing new public interest requirements on television licensees
in exchange for their receipt of digital television channels. A petition has
been filed at the FCC, supported by a number of television broadcast licensees
including Pegasus, questioning whether the digital transmission system standard
adopted by the FCC is adequate to provide acceptable service to television
viewers, or whether television broadcasters should be free to adopt another
standard. Thus
102
<PAGE>
far, the FCC has not acted on this petition. We cannot predict what future
actions the FCC might take with respect to digital television, nor can we
predict the effect of the FCC's present digital television implementation plan
or such future actions on our business.
Pending or Proposed Legislation and FCC Rulemakings. The FCC has initiated
a proceeding seeking comment on whether the public interest would be served by
establishing limits on the amount of commercial matter broadcast by television
stations. The FCC also is conducting a rulemaking proceeding concerning the
implementation of a Class A low power television service, which would afford
qualifying low power stations certain rights accorded to full power stations.
Other matters which could affect our broadcast properties include technological
innovations affecting the mass communications industry and technical allocation
matters, including assignment by the FCC of channels for additional broadcast
stations, low-power television stations and wireless cable systems and their
relationship to and competition with full power television service, as well as
possible spectrum fees or other changes imposed on broadcasters for the use of
their channels. The ultimate outcome of these pending proceedings cannot be
predicted at this time.
The Congress and the FCC have considered in the past and may consider and
adopt in the future:
o other changes to existing laws, regulations and policies or
o new laws, regulations and policies regarding a wide variety of matters
that could affect, directly or indirectly, the operation, ownership, and
profitability of Pegasus' broadcast stations, result in the loss of
audience share and advertising revenues for these stations or affect the
ability of Pegasus to acquire additional broadcast stations or finance
such acquisitions.
Additionally, irrespective of the FCC rules, the Department of Justice and
the Federal Trade Commission have the authority to determine that a particular
transaction presents antitrust concerns. These federal agencies have increased
their scrutiny of the television and radio industries, and have indicated their
intention to review matters related to the concentration of ownership within
markets, including local marketing agreements, even when the ownership or local
marketing agreement in question is permitted under the regulations of the FCC.
There can be no assurance that future policy and rulemaking activities of these
agencies will not impact Pegasus' operations (including existing stations or
markets) or expansion strategy.
Cable Television
The Cable Communications Policy Act of 1984, Cable Television Consumer
Protection and Competition Act of 1992, and the Telecommunications Act of 1996.
The amendments to the Communications Act created uniform national standards and
guidelines for the regulation of cable systems. Among other things, these
amendments generally preempted local control over cable rates in most areas. In
addition, the Communications Act affirms the right of franchising authorities
(state or local, depending on the practice in individual states) to award one
or more franchises within their jurisdictions. It also prohibited
non-grandfathered cable systems from operating without a franchise in such
jurisdictions.
The Communications Act provides for regulation with respect to, among
other things:
o cable system rates for both basic and certain nonbasic services;
o programming access and exclusivity arrangements;
o access to cable channels by unaffiliated programming services;
o leased access terms and conditions;
o horizontal and vertical ownership of cable systems;
o customer service requirements;
o franchise renewals;
o television broadcast signal carriage and retransmission consent;
o technical standards;
o subscriber privacy;
103
<PAGE>
o consumer protection issues;
o cable equipment compatibility;
o obscene or indecent programming; and
o cable system requirements that subscribers subscribe to tiers of service
other than basic service as a condition of purchasing premium services.
Additionally, the legislation encourages competition with existing cable
systems by allowing municipalities to own and operate their own cable systems
without having to obtain a franchise; preventing franchising authorities from
granting exclusive franchises or unreasonably refusing to award additional
franchises covering an existing cable system's service area. The Communications
Act also precludes video programmers affiliated with cable television companies
from favoring those operators over competitors and requires such programmers to
sell their programming to other multichannel video distributors. This provision
limits the ability of cable program suppliers to offer exclusive programming
arrangements to cable television companies. The FCC, the principal federal
regulatory agency with jurisdiction over cable television, has adopted many
regulations to implement the provisions of the Communications Act.
The FCC has the authority to enforce these regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate transmission facilities often used in connection
with cable operations.
On February 8, 1996, the President signed into law substantial amendments
to the Communications Act, which amendments are referred to as the
Telecommunications Act. These amendments alter the regulatory structure
governing the nation's telecommunications providers. It removes barriers to
competition in both the cable television market and the local telephone market.
Among other things, it reduces the scope of cable rate regulation.
Congress and the FCC have frequently revisited the subject of cable
television regulation and may do so again. Future legislative and regulatory
changes could adversely affect Pegasus' operations.
FCC regulation of cable program service tier rates for all systems,
regardless of size, expired on March 31, 1999. However, if rates for cable
program service tiers substantially increase as a result of the expiration of
tier rate regulation, Congress could act to re-impose regulation of those
rates.
Cable Rate Regulation. In June 1995, the FCC adopted rules which provide
significant rate relief for small cable operators, which include operators the
size of Pegasus. Pegasus' current rates are below the maximum presumed
reasonable under the FCC's rules for small operators, and Pegasus may use this
rate relief to justify current rates, rates already subject to pending rate
proceedings and new rates. The Communications Act does not disturb existing
rate determinations of the FCC. Pegasus' basic tier of cable service rates are
not currently subject to local franchising authorities' regulation under the
Communications Act.
Under the Communications Act, rate regulation is precluded wherever a
cable operator faces "effective competition." The Communications Act further
expanded the definition of effective competition to include any franchise area
where a local exchange carrier provides video programming services to
subscribers by any means other than through direct broadcast satellite. There
is no penetration minimum for the local exchange carrier to qualify as an
effective competitor, but it must provide "comparable" programming services in
the franchise area. The FCC has found that all of the Pegasus' cable television
systems are subject to effective competition and therefore are not subject to
rate regulation.
Anti-Buy Through Provisions. In March 1993, the FCC adopted regulations
pursuant to the Communications Act which require cable systems to permit
customers to purchase video programming on a per channel or a per program basis
without the necessity of subscribing to any tier of service, other than the
basic service tier, unless the cable system is technically incapable of doing
so. Generally, this exemption from
104
<PAGE>
compliance with the statute for cable systems that do not have such technical
capability is available until a cable system obtains the capability, but not
later than December 2002. Pegasus' systems have the necessary technical
capability and have complied with this regulation.
Indecent Programming on Leased Access Channels. FCC regulations pursuant
to the Communications Act permit cable operators to restrict or refuse the
carriage of indecent programming on so-called "leased access" channels, i.e.,
channels the operator must set aside for commercial use by persons unaffiliated
with the operator. Operators were also permitted to prohibit indecent
programming on public access channels. In June 1996, the Supreme Court ruled
unconstitutional the indecency prohibitions on public access programming as
well as the "segregate and block" restriction on indecent leased access
programming.
Scrambling. The Communications Act requires that upon the request of a
cable subscriber, the cable operator must, free of charge, fully scramble or
otherwise fully block the audio and video programming of any channel the
subscriber does not want to receive.
Cable operators were also required by the Communications Act to fully
scramble or otherwise fully block the video and audio portion of sexually
explicit or other programming that is indecent on any programming channel that
is primarily dedicated to sexually oriented programming so that a
non-subscriber to such channel may not receive it. Until full scrambling or
blocking occurred, cable operators were required to limit the carriage of such
programming to hours when a significant number of children are not likely to
view the programming, so called "safe-harbor periods." On December 28, 1998,
this requirement to scramble sexually explicit programming was ruled
unconstitutional by the U.S. District Court in Wilmington, Delaware, and the
FCC was directed to stop enforcing this requirement. Pegasus' systems do not
presently have the necessary technical capability to comply with the scrambling
requirement; however, prior to the December 28, 1998 ruling, such programming
was only carried during the safe-harbor period.
Cable Entry Into Telecommunications. The Telecommunications Act declares
that no state or local laws or regulations may prohibit or have the effect of
prohibiting the ability of any entity to provide any interstate or intrastate
telecommunications service. States are authorized to impose "competitively
neutral" requirements regarding universal service, public safety and welfare,
service quality, and consumer protection. The Telecommunications Act further
provides that cable operators and affiliates providing telecommunications
services are not required to obtain a separate franchise from local franchising
authorities for such services. The FCC had held that local franchising
authorities may not place telecommunications conditions in their grants of
cable construction permits. The Telecommunications Act prohibits local
franchising authorities from requiring cable operators to provide
telecommunications service or facilities as a condition of a grant of a
franchise, franchise renewal, or franchise transfer, except that local
franchising authorities can seek "institutional networks" as part of franchise
negotiations.
The Telecommunications Act clarifies that traditional cable franchise fees
may only be based on revenues related to the provision of cable television
services. However, when cable operators provide telecommunications services,
local franchising authorities may require reasonable, competitively neutral
compensation for management of the public rights-of-way.
Interconnection and Other Telecommunications Carrier Obligations. To
facilitate the entry of new telecommunications providers including cable
operators, the Telecommunications Act imposes interconnection obligations on
all telecommunications carriers. All carriers must interconnect their networks
with other carriers and may not deploy network features and functions that
interfere with interoperability. On August 8, 1996, the FCC released its First
Report and Order to implement the interconnection provisions of the 1996 Act.
While the U.S. Court of Appeals for the Eighth Circuit invalidated significant
aspects of the First Report and Order, on January 25, 1999, the U.S. Supreme
Court upheld most of the FCC's interconnection order.
Telephone Company Entry Into Cable Television. The Telecommunications Act
allows telephone companies to compete directly with cable operators by
repealing the telephone company-cable cross-ownership ban and the FCC's video
dialtone regulations. This will allow local exchange carriers, including the
Bell Operating Companies, to compete with cable both inside and outside their
telephone service areas.
The Telecommunications Act replaces the FCC's video dialtone rules with an
"open video system" plan by which wireline competitors can provide cable
service with decreased regulatory burdens. Open video
105
<PAGE>
systems complying with the FCC open video system regulations will receive
relaxed oversight. Only the program access, negative option billing
prohibition, subscriber privacy, Equal Employment Opportunity, public education
and government access requirements, must-carry and retransmission consent
provisions of the Communications Act will apply to entities providing an open
video system. Rate regulation, consumer service provisions, leased access and
equipment compatibility will not apply. Cable copyright provisions will apply
to programmers using an open video system. Local franchising authorities may
require open video system operators to pay "franchise fees" only to the extent
that the open video system provider or its affiliates provide cable services
over the open video system. Such fees may not exceed the franchise fees charged
to cable operators in the area, and the open video service provider may pass
through the fees as a separate subscriber bill item. Open video system
operators will be subject to local franchising authorities. A general
right-of-way management regulations, and local franchising authorities may
require the open video service operator to obtain local authorizations to
provide service.
As required by the Telecommunications Act, the FCC has adopted regulations
prohibiting an open video system operator from discriminating among
programmers, and ensuring that open video system rates, terms, and conditions
for service are reasonable and nondiscriminatory. Further, the FCC has adopted
regulations prohibiting a local exchange carrier-open video system operator, or
its affiliates, from occupying more than one-third of a system's activated
channels when demand for channels exceeds supply, although there are no numeric
limits.
The FCC also has adopted open video system regulations governing channel
sharing; extending the FCC's sports exclusivity, network nonduplication, and
syndex regulations; and controlling the positioning of programmers on menus and
program guides. The Telecommunications Act does not require local exchange
carriers to use separate subsidiaries to provide incidental inter Local Access
and Transport Area video or audio programming services to subscribers or for
their own programming ventures. Most of the FCC's open video system rules were
affirmed by the Fifth Circuit U.S. Court of Appeals on January 19, 1999.
Cable Cross-Ownership. The Telecommunications Act eliminates statutory
restrictions on broadcast/cable cross-ownership, including broadcast
network/cable restrictions, but leaves in place existing FCC regulations
prohibiting local cross-ownership between television stations and cable
systems. The Telecommunications Act leaves in place existing restrictions on
cable cross-ownership with satellite master antenna television and multichannel
multi-point distribution systems facilities, but lifts those restrictions where
the cable operator is subject to effective competition. In January 1995,
however, the FCC adopted regulations which permit cable operators to own and
operate satellite master antenna television systems within their franchise
area, provided that such operation is consistent with local cable franchise
requirements.
Regulation of Signal Carriage. The Communications Act grants broadcasters
a choice of must carry right or retransmission consent rights. The rules
adopted by the FCC generally provided for mandatory carriage by cable systems
of all local full powered commercial television broadcast signals selecting
must carry rights and, depending on a cable system's channel capacity,
non-commercial television broadcast signals. Such statutorily mandated carriage
of broadcast stations coupled with the provisions of the Cable Communications
Policy Act could adversely affect some of Pegasus' cable systems by limiting
the programming services they can offer. The Communications Policy Act requires
cable television systems of 36 or more "activated" channels to reserve a
percentage of such channels for commercial use by unaffiliated third parties
and permits franchise authorities to require the cable operator to provide
channel capacity, equipment and facilities for public, educational, and
governmental access channels. The FCC recently initiated a proceeding to
determine the extent to which cable operators must carry all digital signals
transmitted by broadcasters. The imposition of such additional must carry
regulations could further limit the amount of satellite delivered programming
Pegasus could carry on its cable television systems.
Closed Captioning Regulation. The Communications Act also required the FCC
to establish rules and an implementation schedule to ensure that video
programming is fully accessible to the hearing impaired through closed
captioning. The rules adopted by the FCC will require substantial closed
captioning over an eight or ten year phase-in period with only limited
exceptions.
106
<PAGE>
Emergency Alert System. In September 1997, the FCC released its rules
establishing the deadlines by which cable operators must comply with the new
Emergency Alert System. These deadlines vary depending on how many subscribers
are served by the particular cable system. Pegasus, like all other cable
operators, is responsible for compliance with the Emergency Alert System rules.
Copyright Licensing. Cable systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making
semi-annual payments to a federal copyright royalty pool and meeting certain
other obligations, cable operators obtain a blanket license to certain
retransmit broadcast signals. Bills have been introduced in Congress over the
past several years that would eliminate or modify the cable compulsory license.
The Communications Act's retransmission consent provisions expressly provide
that retransmission consent agreements between television stations and cable
operators do not obviate the need for cable operators to obtain a copyright
license for the programming carried on each broadcaster's signal.
Electric Utility Entry Into Telecommunications. The Telecommunications Act
provides that registered utility holding companies and subsidiaries may provide
telecommunications services, including cable, notwithstanding the Public
Utility Holding Company Act. Electric utilities must establish separate
subsidiaries, known as "exempt telecommunications companies" and must apply to
the FCC for operating authority. It is anticipated that large utility holding
companies will become significant competitors to both cable television and
other telecommunications providers.
State and Local Regulation. Because a cable system uses streets and
rights-of-way, cable systems are subject to state and local regulation,
typically imposed through the franchising process. State and/or local officials
are usually involved in franchisee selection, system design and construction,
safety, consumer relations, billing practices and community-related programming
and services among other matters. Cable systems generally are operated pursuant
to nonexclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Franchises generally are granted for
fixed terms and in many cases are terminable if the franchise operator fails to
comply with material provisions. The Communications Act prohibits the award of
exclusive franchises and allows franchising authorities to exercise greater
control over the operation of franchised cable systems, especially in the area
of customer service and rate regulation. The Communications Act also allows
franchising authorities to operate their own multichannel video distribution
system without having to obtain a franchise and permits states or local
franchising authorities to adopt certain restrictions on the ownership of cable
systems. Moreover, franchising authorities are immunized from monetary damage
awards arising from regulation of cable systems or decisions made on franchise
grants, renewals, transfers and amendments. Under certain circumstances, local
franchising authorities may become certified to regulate basic cable service
rates.
The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of the
cable system. Cable franchises generally contain provisions governing fees to
be paid to the franchising authority, length of the franchise term, renewal,
sale or transfer of the franchise, territory of the franchise, design and
technical performance of the system, use and occupancy of public streets and
number and types of cable services provided.
Although federal law has established certain procedural safeguards to
protect incumbent cable television franchisees against arbitrary denials of
renewal, the renewal of a franchise cannot be assured unless the franchisee has
met certain statutory standards. Moreover, even if a franchise is renewed, a
franchising authority may impose new and stricter requirements, such as the
upgrading of facilities and equipment or higher franchise fees, subject,
however, to limits set by federal law. To date, however, no request of Pegasus
for franchise renewals or extensions has been denied. Despite favorable
legislation and good relationships with its franchising authorities, there can
be no assurance that franchises will be renewed or extended.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable systems, and several states have adopted
legislation subjecting cable systems to the jurisdiction of centralized state
governmental agencies, some that impose regulation similar to that of a public
utility. Attempts in other states to regulate cable systems are continuing and
can be expected to increase. Such proposals and legislation may be preempted by
federal statute and/or FCC regulation. Puerto Rico has recently adopted new
state level regulations.
107
<PAGE>
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
industry. Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements currently are the subject
of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable systems operate. Neither the outcome of these proceedings nor the
impact upon the cable industry or Pegasus' cable systems can be predicted at
this time.
Inside Wiring. In a 1997 order, the FCC established rules that require an
incumbent cable operator upon expiration or termination of a multiple dwelling
unit service contract to sell, abandon, or remove "home run" wiring that was
installed by the cable operator in a multiple dwelling unit building. These
inside wiring rules will assist building owners in their attempts to replace
existing cable operators with new video programming providers who are willing
to pay the building owner a higher fee. Additionally, the FCC has proposed
abrogating all exclusive multiple dwelling unit contracts held by cable
operators, but at the same time allowing competitors to cable to enter into
exclusive multiple dwelling unit service contracts.
Internet Service Regulation. Although there is no significant federal
regulation of cable system delivery of Internet services at the current time,
and the FCC recently issued a report to Congress finding no immediate need to
impose such regulation, this situation may change as cable systems expand their
broadband delivery of Internet services. In particular, proposals have been
advanced at the FCC that would require cable operators to provide access to
unaffiliated internet service providers and online service providers. Certain
Internet service providers also are attempting to use existing commercial
leased access provisions of the Telecommunications Act to gain access to cable
system delivery. Finally, some local franchising authorities are considering
the imposition of mandatory Internet access requirements as part of cable
franchise renewals or transfer approvals.
Other FCC Regulations. In addition to the FCC regulations noted above,
there are other FCC regulations covering such areas as:
o equal employment opportunity;
o customer privacy;
o programming practices -- including, among other things, syndicated
program exclusivity, network program nonduplication, local sports
blackouts, indecent programming, lottery programming, political
programming, sponsorship identification, and children's programming
advertisements;
o registration of cable systems and facilities licensing;
o maintenance of various records and public inspection files;
o frequency usage;
o lockbox availability;
o antenna structure notification;
o tower marking and lighting;
o consumer protection and customer service standards;
o technical standards; and
o consumer electronics equipment compatibility.
Legal Proceedings
On June 3, 1999, the National Rural Telecommunications Cooperative filed a
lawsuit in federal court against DIRECTV seeking a court order to enforce the
National Rural Telecommunications Cooperative's contractual rights to obtain
from DIRECTV certain premium programming formerly distributed by United States
Satellite Broadcasting Company, Inc. for exclusive distribution by the National
Rural Telecommunications Cooperative's members and affiliates in their rural
markets. The National Rural
108
<PAGE>
Telecommunications Cooperative also sought a temporary restraining order
preventing DIRECTV from marketing the premium programming in such markets and
requiring DIRECTV to provide the National Rural Telecommunications Cooperative
with the premium programming for exclusive distribution in those areas. The
court, in an order dated June 17, 1999, denied the National Rural
Telecommunications Cooperative a preliminary injunction on such matters,
without deciding the underlying claims. On July 22, 1999, DIRECTV responded to
the National Rural Telecommunications Cooperative's continuing lawsuit by
rejecting the National Rural Telecommunications Cooperative's claims to
exclusive distribution rights and by filing a counterclaim seeking judicial
clarification of certain provisions of DIRECTV's contract with the National
Rural Telecommunications Cooperative. In particular, DIRECTV contends in its
counterclaim that the term of DIRECTV's contract with the National Rural
Telecommunications Cooperative is measured solely by the orbital life of DBS-1,
the first DIRECTV satellite launched into orbit at the 101o W orbital location,
without regard to the orbital lives of the other DIRECTV satellites at the 101o
W orbital location. DIRECTV also alleges in its counterclaim that the National
Rural Telecommunications Cooperative's right of first refusal, which is
effective at the end of the term of DIRECTV's contract with the National Rural
Telecommunications Cooperative, does not provide for certain programming and
other rights comparable to those now provided under the contract. On September
8, 1999, the court denied a motion by DIRECTV to dismiss certain of the
National Rural Telecommunications Cooperative's claims, leaving all of the
causes of action asserted by the National Rural Telecommunications Cooperative
at issue.
On September 9, 1999, the National Rural Telecommunications Cooperative
filed a response to DIRECTV's counterclaim contesting DIRECTV's interpretations
of the end of term and right of first refusal provisions. On August 26, 1999,
the National Rural Telecommunications Cooperative filed a separate lawsuit in
federal court against DIRECTV claiming that DIRECTV had failed to provide to
the National Rural Telecommunications Cooperative its share of launch fees and
other benefits that DIRECTV and its affiliates have received relating to
programming and other services. On November 15, 1999, the court granted a
motion by DIRECTV and dismissed a portion of the National Rural
Telecommunications Cooperative's lawsuit regarding launch fees and other
benefits. In particular, the court dismissed the tort claim asserted by the
National Rural Telecommunications Cooperative, but left in place the remaining
claims asserted by the National Rural Telecommunications Cooperative. The court
also consolidated that lawsuit with the other pending National Rural
Telecommunications Cooperative/DIRECTV lawsuit. The court set various discovery
and motion deadlines for the spring and summer of 2000 but did not set a trial
date.
On December 29, 1999, DIRECTV filed a motion for partial summary judgment.
The motion seeks a court order that the National Rural Telecommunications
Cooperative's right of first refusal, effective at the termination of DIRECTV's
contract with the National Rural Telecommunications Cooperative, does not
include programming services and is limited to 20 program channels of
transponder capacity. The hearing date on DIRECTV's motion was vacated by the
court pending resolution of certain procedural issues raised by a new lawsuit
we and Golden Sky filed against DIRECTV, discussed below. The court has not yet
set a trial date on the merits of the motion for partial summary judgment.
On January 10, 2000, we and Golden Sky filed a class action lawsuit in
federal court in Los Angeles against DIRECTV as representatives of a proposed
class that would include all members and affiliates of the National Rural
Telecommunications Cooperative that are distributors of DIRECTV. The complaint
contains causes of action for various torts, common counts and declaratory
relief based on DIRECTV's failure to provide the National Rural
Telecommunications Cooperative with premium programming, thereby preventing the
National Rural Telecommunications Cooperative from providing this programming
to the class members and affiliates. The claims are also based on DIRECTV's
position with respect to launch fees and other benefits, term and rights of
first refusal. The complaint seeks monetary damages and a court order regarding
the rights of the National Rural Telecommunications Cooperative and its members
and affiliates.
On February 10, 2000, we and Golden Sky filed an amended complaint which
added new tort claims against DIRECTV for interference with plaintiffs'
relationships with manufacturers, distributors and dealers of direct broadcast
satellite equipment. We and Golden Sky also withdrew the class action
allegations to allow a new class action to be filed on behalf of the members
and affiliates of the National Rural Telecommunications Cooperative. The
outcome of this litigation and the litigation filed by the National Rural
Telecommunications
109
<PAGE>
Cooperative could have a material adverse effect on our direct broadcast
satellite business.
In November 1998 we were sued in Indiana for allegedly charging DBS
subscribers excessive fees for late payments. The plaintiffs, who claim to
represent a class consisting of residential DIRECTV customers in Indiana, seek
unspecified damages for the purported class and modification of our late-fee
policy. We are unable to estimate the amount involved or to determine whether
this suit is material to us. Similar suits have been brought against DIRECTV
and various cable operators in other parts of the United States.
In addition to the matters discussed above, from time to time we are
involved with claims that arise in the normal course of our business. In our
opinion, the ultimate liability with respect to these claims will not have a
material adverse effect on our consolidated operations, cash flows or financial
position.
Properties
Our corporate headquarters are located in Bala Cynwyd, Pennsylvania. In
February 2000, we purchased our corporate headquarters building for $12.5
million with mortgage financing of approximately $8.8 million.
Our direct broadcast satellite operations are headquartered in
Marlborough, Massachusetts and we operate call centers out of leased space in
San Luis Obispo, California, Marlborough, Massachusetts, and Louisville,
Kentucky. These leases expire on various dates through 2002. In connection with
our TV operations, we own or lease various transmitting equipment, television
stations, and office space. Our cable operations include office, head end, and
warehouse space in Puerto Rico. The property that we do not own in Puerto Rico
is operated under various leases expiring at various dates through 2004. Our
property in Puerto Rico will be sold in connection with the pending sale of our
Puerto Rico cable system.
110
<PAGE>
BUSINESS OF GOLDEN SKY
General
Golden Sky Holdings, Inc. is the parent company of Golden Sky DBS, Inc.,
which is the parent company of Golden Sky Systems, Inc. Golden Sky Systems,
Inc. is the primary operating subsidiary of Golden Sky. References in this
section to Golden Sky therefore refer to Golden Sky Holdings, Inc., acting
through its subsidiaries Golden Sky DBS, Inc. and Golden Sky Systems, Inc.
Golden Sky is the second largest independent provider of DIRECTV satellite
television programming in rural markets in the United States. Under its
agreements with the National Rural Telecommunications Cooperative, it has the
exclusive right to provide DIRECTV programming in the following rural DIRECTV
markets and to receive the monthly service revenue from all DIRECTV subscribers
in these markets regardless of the subscribers' original point of purchase.
<TABLE>
<CAPTION>
Number of Rural
Geographical Area DIRECTV Markets Total Households States Represented
- ------------------------ ----------------- ------------------ --------------------
<S> <C> <C> <C>
Southeast .............. 6 210,000 AL, FL, GA, NC, TN
Southwest .............. 13 520,000 AR, OK, TX
Midwest ................ 21 547,000 IA, KS, MI, MN, MO,
ND, NE, WI
Rocky Mountain ......... 10 227,000 CO, ID, MT, UT, WY
Pacific ................ 7 357,000 CA, NV, OR
-- -------
Total .................. 57 1,861,000
== =========
</TABLE>
- ------------
Total households are based on estimates of primary residences by Claritas, Inc.
Golden Sky's subscriber base has increased rapidly due to acquisitions,
internal growth and a relatively low churn rate. Golden Sky's annual churn rate
approximated 15.9% during the twelve-month period ended December 31, 1999.
Sales and Distribution
Golden Sky offers DIRECTV programming to consumer and business segments in
its rural DIRECTV markets through two separate but complementary sales and
distribution channels.
Direct Sales Force and Dealer Network. Golden Sky has established direct
sales forces in its rural markets to market DIRECTV programming services. Its
direct sales force currently consists of approximately 225 direct salespeople
who are compensated on a commission basis. Since its inception, Golden Sky has
opened approximately 70 full service retail stores in its rural DIRECTV
markets. Golden Sky also has close relationships with approximately 450
independent dealers of direct broadcast satellite equipment to whom it provides
marketing, subscriber authorization, installation and customer service support.
Wherever possible, Golden Sky's arrangements with dealers are exclusive. In
connection with the sale of a direct broadcast satellite unit and a
subscription to DIRECTV programming, a dealer retains the proceeds from the
sale of the equipment and earns a one-time commission paid by Golden Sky.
Golden Sky retains the ongoing monthly subscription revenue from the
subscriber. For equipment sold through the indirect dealer network, Golden Sky
generally provides a subsidy, thus lowering the price of the equipment for the
consumer. During the year ending December 31, 2000, Golden Sky plans to close
approximately 30 of its local sales offices.
Other Distribution Channels. In addition to its direct sales force, Golden
Sky utilizes other distribution channels to offer DIRECTV programming to
potential subscribers in its rural DIRECTV markets, including:
o national retailers selected by DIRECTV;
o consumer electronics dealers authorized by DIRECTV to sell DIRECTV
programming; and
o satellite dealers and consumer electronics dealers authorized by five
regional sales management agents selected by DIRECTV.
111
<PAGE>
In a similar fashion to its indirect dealer network, Golden Sky pays a one-time
commission to these distribution channels for the sale of DIRECTV programming
to a subscriber located in its rural DIRECTV markets and Golden Sky receives
all associated monthly programming revenue associated therewith, regardless of
what outlet originally sold DIRECTV programming to the subscriber.
Marketing
Golden Sky believes that direct broadcast satellite services compete
favorably with medium and low-power direct-to-home, cable and other
subscription television services on the basis of superior signal quality,
channel capacity, programming choice and price. Golden Sky complements the
existing marketing effort of DIRECTV and its other national distribution
partners through focused local marketing and sales, including local print and
radio advertising.
Golden Sky also implements support-advertising programs for its indirect
distribution channels. Golden Sky has implemented specific promotions, like
offering new subscribers an initial month's service at no charge, to motivate
customers to purchase these plans. Golden Sky also has incentive-based sales
compensation for both its direct and dealer sales forces to promote and sell
premium subscription plans.
A key element of Golden Sky's marketing strategy is to offer value-priced
direct broadcast satellite equipment and installation through the use of
subsidies on direct sales of direct broadcast satellite equipment and
installations to lower the up-front costs to consumers of becoming Golden Sky
subscribers. Golden Sky offers various types of direct broadcast satellite
equipment and accessories through its direct sales force and retail locations.
Golden Sky is able to take advantage of volume discounts in purchasing this
equipment from the National Rural Telecommunications Cooperative and other
vendors. In addition, dealers are motivated to lower the prices at which they
offer direct broadcast satellite equipment and installation by Golden Sky's
volume-based commission structure.
Customer Service
Golden Sky provides customer service from each of its local offices.
Generally, its offices are staffed from 9 a.m. to 7 p.m., six days a week.
Local managers are responsible for managing customer accounts receivable and
churn. Overflow and after hours assistance is provided 24 hours a day, seven
days a week, by Golden Sky's national call center located in Kansas City,
Missouri and, beginning in February 2000, by a third-party provider of call
center services. Golden Sky also provides professional installation services
and technical assistance in each of its offices.
National Rural Telecommunications Cooperative and DIRECTV
For a description of the National Rural Telecommunications Cooperative and
DIRECTV and rights granted to Golden Sky under the National Rural
Telecommunications Cooperative member agreements, see Business of Pegasus --
Direct Broadcast Satellite Agreements, Licenses, Local Marketing Agreements and
Cable Franchises -- Direct Broadcast Satellite Agreements.
Competition
Golden Sky faces competition for subscribers within its exclusive rural
DIRECTV markets from a broad range of companies offering communications and
entertainment services, including cable operators, other satellite service
providers, wireless cable operators, telephone companies, television networks
and home video product companies. Many of Golden Sky's competitors have greater
financial and marketing resources than it does and the business of providing
subscription and pay television programming is highly competitive. Golden Sky
believes that quality and variety of programming, signal quality, service and
cost are the key bases of competition.
Competing Subscription Television Providers
Cable Television Providers. Cable operators in the United States serve
approximately 65 million subscribers, representing over 65% penetration of
television households passed by cable systems. Cable
112
<PAGE>
operators typically offer 30 to 80 channels of programming at an average
monthly subscription price of approximately $36. While cable companies
currently serve a majority of the U.S. television market, Golden Sky believes
many may not be able to provide the quality and variety of programming offered
by DIRECTV until they significantly upgrade their coaxial systems. Many cable
television providers are in the process of upgrading their systems and other
cable operators have announced their intentions to make significant upgrades.
Many proposed upgrades, like conversion to digital format, fiber optic cabling,
advanced compression technology and other technological improvements, when
fully completed, will permit cable companies to increase channel capacity,
thereby increasing programming alternatives, and to deliver a better quality
signal. Although cable systems with adequate channel capacity may offer digital
service without major rebuilds, Golden Sky believes that other cable systems
that have limited channel capacity, like those in most of the rural DIRECTV
markets, will have to be upgraded to add bandwidth in order to provide digital
service. Golden Sky believes that these upgrades will require substantial
investments of capital and time to complete industry-wide. As a result, Golden
Sky believes that there will be a substantial delay before cable systems in the
rural DIRECTV markets can offer programming services equivalent to direct
broadcast satellite providers and that some cable systems in those markets may
not be upgraded, subject to advances in digital compression technology
currently under development.
Golden Sky expects to encounter a number of challenges in competing with
cable television providers. First, cable operators have an entrenched position
in the marketplace. However, Golden Sky believes that its current strategy of
targeting rural DIRECTV markets that are not served by cable or are underserved
by cable partially offsets the cable industry's position in the consumer
marketplace. Second, the up-front costs to the consumer associated with
purchasing and installing direct broadcast satellite equipment are higher than
the up-front costs for installation of cable television. However, prices for
direct broadcast satellite equipment have declined consistently since
introduction and Golden Sky believes that competition among direct broadcast
satellite equipment vendors and technological improvements will create
continuing downward pressure on prices. Third, direct broadcast satellite
systems, unlike cable, do not currently provide local broadcast programming via
satellite, except in certain large metropolitan markets in the United States.
Both DIRECTV and EchoStar have announced their intentions to provide local
broadcast service in additional large metropolitan areas of the country in the
near future. Seamless switching between satellite and broadcast programming
from other sources is possible with all direct broadcast satellite units. In
addition, DIRECTV provides programming from affiliates of the national
broadcast networks to subscribers who are unable to receive networks over the
air and do not subscribe to cable. See -- Regulation.
Other Direct-To-Home Television Providers. EchoStar, the only other
remaining direct broadcast satellite provider in the United States, began
national broadcasting of programming in March 1996 and currently broadcasts
approximately 500 channels of digital television programming and CD quality
audio programming services to the entire continental United States. EchoStar
has 21 licensed channel frequencies at the 119 degrees W.L. orbital position
and 28 licensed channel frequencies at the 110 degrees W.L. orbital position.
The 110 degrees and 119 degrees W.L. orbital positions are two of the three
direct broadcast satellite orbital locations that can serve the entire
continental United States. These three orbital locations are sometimes referred
to as full "CONUS." EchoStar also has 69 frequencies in other partial CONUS
orbital locations. EchoStar reported approximately 3.4 million subscribers as
of December 31, 1999. In June 1999, EchoStar acquired its license for 28 direct
broadcast satellite frequencies at 110 degrees W.L., two satellites to be
delivered in orbit and a direct broadcast operations facility from The News
Corporation Limited and MCI WorldCom Inc. EchoStar expects to significantly
expand its direct broadcast satellite and other programming offerings as a
result of this acquisition, which will potentially strengthen its competitive
strength relative to DIRECTV and Golden Sky.
Primestar, a medium-power direct-to-home provider, launched the first
digital direct-to-home satellite television service in 1994. On April 28, 1999,
Hughes acquired Primestar's medium-power direct-to-home business, which
consisted of its subscribers and related high-power satellite assets, for
approximately $1.8 billion. Prior to its acquisition by Hughes, Primestar
offered a full range of programming to approximately 2.3 million subscribers
nationwide, approximately 100,000 of which Golden Sky believes were located
within Golden Sky's rural DIRECTV markets. Former Primestar subscribers that
choose to receive DIRECTV programming in Golden Sky's rural markets will become
its subscribers.
113
<PAGE>
Low-power C-band direct-to-home operators reported approximately 1.6
million subscribers as of December 31, 1999. C-band direct-to-home operators
provide subscription television services primarily to subscribers who live in
markets not served by cable television. C-band equipment, including the
six-to-eight-foot dish necessary to receive the low-power signal, currently
costs approximately $2,000 and is distributed by local TVRO satellite dealers.
Based upon publicly available data, Golden Sky believes that, during 1998 and
1999, the number of C-band customers decreased by 465,000 subscribers.
Other Competitors
Regional telephone companies and other long distance companies could
become significant competitors in the future, as they have expressed an
interest in becoming subscription multi-channel video programming distributors.
Furthermore, the Telecommunications Act of 1996 removes barriers to entry that
previously inhibited local telephone companies from competing, or made it more
difficult for telephone companies to compete, in the provision of video
programming and information services. Several telephone companies have received
authorization to test market video and other services in specified geographic
areas using fiber optic cable and digital compression over existing telephone
lines. Estimates for the timing of wide-scale deployment of these multi-channel
video services vary, as several telephone companies have pushed back or
cancelled originally announced deployment schedules. In addition, mergers,
joint ventures and alliances among franchise, wireless or private cable
television operators and regional telephone companies may result in competitors
capable of offering bundled cable television and telecommunications services.
For example, the merger of AT&T and Tele-Communications, Inc. resulted in a
large, integrated communications provider with significantly greater technical,
financial and marketing resources than Golden Sky has.
As more telephone companies begin to provide multi-channel video
programming and other information and communications services to their
customers, additional significant competition for subscribers will develop.
Among other things, telephone companies have an existing relationship with
substantially every household in their service area, substantial financial
resources and an existing infrastructure. Further, telephone companies may be
able to subsidize the delivery of programming through their position as the
sole source of local wireline telephone service to the home.
Most areas of the United States are covered by traditional terrestrial
over-the-air VHF/UHF television broadcasters. Consumers can receive from three
to ten channels of over-the-air programming in most markets. These stations
provide local, network and syndicated programming free of charge, but each
major market is generally limited in the number of programming channels. On
August 5, 1997, Congress approved the release of additional digital spectrum
for use by VHF/UHF broadcasters.
Regulation
For a description of certain statutes and regulations applicable to Golden
Sky's business, see Business of Pegasus -- Legislation and Regulation.
Facilities
On January 27, 1999, Golden Sky entered into a lease with respect to
approximately 35,000 square feet of office space in Kansas City, Missouri.
Annual rent under this lease approximates $570,000 and the lease will terminate
in August 2002. Golden Sky moved its principal executive offices to this
location in April 1999. In addition, Golden Sky currently has approximately 70
local offices in 24 states.
Management and Employees
As of January 31, 2000, Golden Sky had 580 full-time and 191 part-time
employees. Golden Sky is not a party to any collective bargaining agreement and
considers its relations with its employees to be good.
Legal Proceedings
For a description of certain legal proceedings to which Golden Sky is a
party or in which it has an interest as a result of its status as a non-voting
affiliate of the National Rural Telecommunications Cooperative, see Business of
Pegasus -- Legal Proceedings. Golden Sky is not currently a party to any other
material legal proceedings.
114
<PAGE>
PEGASUS MANAGEMENT
Executive Officers, Directors, and Designees for Director
Set forth below is certain information concerning the executive officers
and directors of Pegasus.
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------- ----- -------------------------------------------------------------
<S> <C> <C>
Marshall W. Pagon .............. 44 Chairman of the Board, President and Chief Executive Officer
Robert N. Verdecchio ........... 43 Senior Vice President, Chief Financial Officer, Treasurer,
Assistant Secretary and Director
Ted S. Lodge ................... 43 Senior Vice President, Chief Administrative Officer, General
Counsel, Secretary and Director Designee
Howard E. Verlin ............... 38 Vice President and Assistant Secretary
Nicholas A. Pagon .............. 43 Vice President
M. Kasin Smith ................. 39 Vice President and Acting Chief Financial Officer
Michael C. Brooks .............. 55 Director
Harry F. Hopper III ............ 46 Director
James J. McEntee, III .......... 42 Director
Mary C. Metzger ................ 54 Director
William P. Phoenix ............. 42 Director
Riordon B. Smith ............... 39 Director
Donald W. Weber ................ 63 Director
Robert F. Benbow ............... 64 Director Designee
William P. Collatos ............ 45 Director Designee
</TABLE>
Marshall W. Pagon has served as President, Chief Executive Officer and
Chairman of the Board of Pegasus since its incorporation, and served as
Treasurer of Pegasus from its incorporation to June 1997. From 1991 to October
1994, when the assets of various affiliates of Pegasus Media & Communications,
Inc., principally limited partnerships that owned and operated Pegasus'
broadcast and cable operations, were transferred to Pegasus Media &
Communication's subsidiaries, entities controlled by Mr. Pagon served as the
general partners of these partnerships and conducted the business of Pegasus.
Mr. Pagon's background includes over 18 years of experience in the media and
communications industry. Mr. Pagon is the brother of Nicholas A. Pagon.
Robert N. Verdecchio has served as Pegasus' Senior Vice President, Chief
Financial Officer and Assistant Secretary since its inception and as Pegasus'
Treasurer since June 1997. He has also served similar functions for Pegasus
Media & Communication's affiliates and predecessors in interest since 1990. Mr.
Verdecchio has been a director of Pegasus and Pegasus Media & Communications
since December 18, 1997. Mr. Verdecchio is a certified public accountant and
has over 13 years of experience in the media and communications industry. Mr.
Verdecchio is serving as a director of Pegasus as Marshall W. Pagon's designee
to the board of directors. Mr. Verdecchio is currently on a leave of absence
from Pegasus.
Ted S. Lodge has served as Senior Vice President, Chief Administrative
Officer, General Counsel and Assistant Secretary of Pegasus since July 1, 1996.
In June 1997, Mr. Lodge became Pegasus' Secretary. From June 1992 through June
1996, Mr. Lodge practiced law with the law firm of Lodge & Company. During that
period, Mr. Lodge was engaged by Pegasus as its outside legal counsel in
connection with various matters. Mr. Lodge is expected to be elected a director
of Pegasus, as one of Mr. Pagon's designees, at the time of the special
meeting.
115
<PAGE>
Howard E. Verlin is a Vice President and Assistant Secretary of Pegasus
and is responsible for operating activities of Pegasus' direct broadcast
satellite and cable subsidiaries, including supervision of their general
managers. Mr. Verlin has served similar functions with respect to Pegasus'
predecessors in interest and affiliates since 1987 and has over 15 years of
experience in the media and communications industry.
Nicholas A. Pagon has served as a Vice President of Pegasus and Chief
Executive Officer of its broadcast subsidiaries since November 1998 and is
responsible for all broadcast television activities of Pegasus. From January to
November 1998, Mr. Pagon served as President of Pegasus Development
Corporation, a subsidiary of Pegasus. From 1990 through December 1998, Mr.
Pagon was President of Wellspring Consulting, Inc., a telecommunications
consulting business. Mr. Pagon is the brother of Marshall W. Pagon.
M. Kasin Smith served as a financial analyst of Pegasus from September
1998 through February 1999 and has served as Vice President of Finance since
February 1999 and Acting Chief Financial Officer since August 1999. From May
1997 through September 1998, Mr. Smith served as a General Manager, Northwest
region, of SkyView World Media Group, a master system operator for DIRECTV.
From November 1996 to May 1997, Mr. Smith was director of finance for Sky Zone
Media Access, LLC, a distributor of DIRECTV to apartments and multiple dwelling
units. From 1993 to November 1996, Mr. Smith served as a manager at
PricewaterhouseCoopers LLP. Mr. Smith is a certified public accountant and has
over 8 years of public accounting experience.
Michael C. Brooks has been a director of Pegasus since April 27, 1998.
From February 1997 until April 27, 1998, Mr. Brooks had been a director of
Digital Television Services, Inc. He has been a general partner of J.H. Whitney
& Co., a venture capital firm, since January 1985. Mr. Brooks is also a
director of Media Matrix, an Internet audience measurement company, SunGuard
Data Systems Inc., a computer services company, USinternetworking, Inc., a
web-based applications hosting company, and several private companies. Mr.
Brooks is serving as a director of Pegasus as Whitney's designee to the board
of directors and has informed Pegasus that he intends to resign from the
Pegasus board at the time of the special meeting.
Harry F. Hopper III has been a director of Pegasus since April 27, 1998.
From June 1996 until April 27, 1998, Mr. Hopper had been a director of Digital
Television Services, Inc., or a manager of its predecessor, Digital Television
Services, LLC. Mr. Hopper is a Managing Director of Columbia Capital
Corporation and Columbia Capital LLC, which he joined in January 1994. Columbia
Capital is a venture capital firm with an investment focus on communications
services, network infrastructure and technologies and electronic commerce. Mr.
Hopper is also a director of eBiz.Net, Inc., a web-hosting company, Pacific
Internet Exchange Corporation, an Internet peering and data center company,
Xemod, Inc., a producer of next-generation linear power amplifiers,
Singleshop.com, Inc., a business-to-business, outsourced Internet shopping
platform, and Broadslate Networks, Inc., a digital subscriber line service
provider. Mr. Hopper is serving as a director of Pegasus as Columbia's designee
to the board of directors.
James J. McEntee, III has been a director of Pegasus since October 8,
1996. Mr. McEntee has been a member of the law firm of Lamb, Windle & McErlane,
P.C. for the past eight years and a principal of that law firm for the past six
years. Mr. McEntee is one of the directors designated as an independent
director under the voting agreement.
Mary C. Metzger has been a director of Pegasus since November 14, 1996.
Ms. Metzger has been Chairman of Personalized Media Communications LLC and its
predecessor company, Personalized Media Communications Corp. since February
1989. Ms. Metzger has also been Managing Director of Video Technologies
International, Inc. since June 1986. Ms. Metzer is one of the directors
designated as an independent director under the voting agreement. She is also a
designee of Personalized Media under the agreement between Pegasus and
Personalized Media. See Certain Transactions.
William P. Phoenix has been a director of Pegasus since June 17, 1998. He
is a Managing Director of CIBC World Markets Corp. and co-head of its Credit
Capital Markets Group. Mr. Phoenix is also a member of CIBC World Markets
Corp.'s credit investment and risk committees. Prior to joining CIBC World
Markets Corp. in 1995, Mr. Phoenix had been a Managing Director of Canadian
Imperial Bank of Commerce with management responsibilities for the bank's
acquisition finance, mezzanine finance and loan workout and restructuring
businesses. Mr. Phoenix joined Canadian Imperial Bank of Commerce in 1982. Mr.
Phoenix is one of the directors designated as an independent director under the
voting agreement.
116
<PAGE>
Riordon B. Smith has been a director of Pegasus since April 27, 1998. From
February 1997 until April 27, 1998, Mr. Smith had been a director of Digital
Television Services, Inc., or a manager of its predecessor, Digital Television
Services, LLC. Mr. Smith is a Senior Vice President of Fleet Private Equity
Co., Inc., which he joined in 1990. Fleet Private Equity Co., Inc. is a private
equity fund with an investment focus in media and information,
telecommunications, healthcare services, industrial manufacturing and business
services. Mr. Smith also serves as a director of FreeRide.com LLC, a provider
of online loyalty programs and direct marketing services, The MVL Group, Inc.,
a provider of custom market research and data collection services, HASCO
International, Inc., a direct marketer of in-hospital infant portraits, and
Root Communications Group, L.P., an operator of radio stations in the
Southeast. Mr. Smith is serving as a director of Pegasus as Fleet's designee to
the board of directors.
Donald W. Weber has been a director of Pegasus since its incorporation and
a director of Pegasus Media & Communications since November 1995. Until its
acquisition by Pegasus in November 1997, Mr. Weber had been the President and
Chief Executive Officer of ViewStar Entertainment Services, Inc., a National
Rural Telecommunications Cooperative affiliate that distributed DIRECTV
services in North Georgia, from August 1993 to November 1997. Mr. Weber is
currently a member of the boards of directors of Powertel, Inc., a provider of
wireless communications service, Knology Holdings, Inc., a provider of
broadband communications service, Headhunter.net an online employment
recruiter, and HIE, Inc., a producer of healthcare software, which are
publicly-traded companies. Mr. Weber is one of the directors designated as an
independent director under the voting agreement.
Robert F. Benbow will be designated as a director by Alta Communications
under the amended and restated voting agreement. See The Merger -- Voting
Agreement. Mr. Benbow has been a director of Golden Sky and its predecessors
since February 1997. He is a Vice President of Burr, Egan, Deleage & Co., a
private venture capital firm, and a managing general partner of Alta
Communications, Inc., a private venture capital firm. Prior to joining Burr,
Egan, Deleage & Co. in 1990, Mr. Benbow spent 22 years with the Bank of New
England N.A., where he was a Senior Vice President responsible for special
industries lending in the areas of media, project finance and energy.
Additionally, he serves as a director of Diginet Americas, Inc., a fixed
wireless local loop service provider throughout South America, of Advanced
Telcom Group, Inc., a competitive local exchange carrier, and of Preferred
Networks, Inc., a public paging company.
William P. Collatos will be designated as a director by Spectrum Equity
Investors under the amended and restated voting agreement. See The Merger --
Voting Agreement. Mr. Collatos has been a director of Golden Sky and its
predecessors since March 1997. He is a managing general partner of Spectrum
Equity Investors, a private equity investment firm focused on the
communications services, networking infrastructure, electronic commerce and
media industries, which he founded in 1993. He serves as director of Galaxy
Telecom, GP, the general partner of Galaxy Telecom, L.P., which owns, operates
and develops cable television systems, ITXC Corp., a global provider of
Internet-based voice, fax and voice-enabled services, and JazzTel, a
competitive local exchange provider based in Madrid, Spain.
Executive Compensation
The following table sets forth certain information for Pegasus' last three
fiscal years concerning the compensation paid to the Chief Executive Officer
and to each of Pegasus' four most highly compensated officers. The most highly
compensated officers are those whose total annual salary and bonus for the
fiscal year ended December 31, 1999 exceeded $100,000.
<TABLE>
<CAPTION>
Annual
Compensation
-------------------------------------------
Other
Annual
Name Principal Position Year Salary Compensation(1)
- ---------------------- --------------------- ------ ---------------- -----------------
<S> <C> <C> <C> <C>
Marshall W. Pagon President and Chief 1999 $ 274,743 --
Executive Officer 1998 $ 200,000 --
1997 $ 200,000 --
Robert N. Verdecchio Senior VP and Chief 1999 $ 188,717 $50,000
Financial Officer 1998 $ 150,000 --
1997 $ 150,000 --
Ted S. Lodge Senior VP, Chief 1999 $ 164,647 $50,000
Administrative
Officer 1998 $ 150,000 --
and General Counsel 1997 $ 150,000 --
Howard E. Verlin VP, Satellite and 1999 $ 155,974 $45,000
Cable Television 1998 $ 135,000 --
1997 $ 135,000 --
Nicholas A. Pagon Vice President 1999 $ 133,442 --
1998 $ 13,666(5) --
</TABLE>
<TABLE>
<CAPTION>
Long-Term
Compensation Awards
--------------------------
Restricted Securities
Stock Underlying All Other
Name Award(2) Options Compensation(3)
- ---------------------- ------------ ------------ ----------------
<S> <C> <C> <C>
Marshall W. Pagon $124,978 190,000 $60,096(4)
$ 77,161 85,000 $67,274(4)
$100,558 85,000 $63,228(4)
Robert N. Verdecchio $ 49,967 70,000 $ 6,380
$ 38,580 40,000 $12,720
$ 50,279 40,000 $ 9,500
Ted S. Lodge $ 54,068 85,000 $ 3,600
$ 30,864 60,000 $ 9,263
$ 40,223 40,000 $ 1,800
Howard E. Verlin $ 99,974 95,000 $ 1,620
$110,125 40,000 $ 5,480
$100,558 40,000 $ 1,685
Nicholas A. Pagon -- 45,000 --
-- 40,000 --
</TABLE>
117
<PAGE>
- ------------
(1) Pursuant to Pegasus' restricted stock plan, an executive officer may elect
to receive a portion of the award in the form of cash. The amounts listed
in this column reflect the cash portion of discretionary awards granted
under the restricted stock plan.
(2) During fiscal 1999, an aggregate of 3,164, 2,531, 2,685 and 3,670 shares
were granted to Messrs. Marshall Pagon, Verdecchio, Lodge and Verlin,
respectively. Based upon the closing price of the Class A common stock on
December 31, 1999 of $97.75 per share, the shares awarded to Messrs.
Marshall Pagon, Verdecchio, Lodge and Verlin during fiscal 1999 had a
value of $309,281, $247,405, $262,459, and $358,743, respectively, on
December 31, 1999. All awards made during fiscal 1999 were fully vested on
the date of grant. Generally, awards made under Pegasus' restricted stock
plan were based upon years of service with Pegasus from date of initial
employment. As a consequence, all awards made to Messrs. Marshall Pagon,
Verdecchio and Verlin were fully vested in 1997 and 1998 on the date of
grant. During 1997, 9,090, 4,545, and 9,090 shares issued to Messrs.
Marshall Pagon, Verdecchio, and Verlin were fully vested on March 21,
1997, the date they were granted. During 1998, 3,609, 1,804 and 5,152
shares issued to Messrs. Marshall Pagon, Verdecchio and Verlin were fully
vested on February 17, 1998, the date they were granted. Mr. Lodge's
employment with Pegasus began on July 1, 1996. Mr. Lodge's awards granted
in fiscal 1998 were vested as to 34% on July 1, 1998, an additional 33% on
July 1, 1999 and the remaining 33% on July 1, 2000.
(3) Unless otherwise indicated, the amounts listed represent Pegasus'
contributions under its 401(k) plans.
(4) Of the amounts listed for Marshall W. Pagon for 1999, 1998 and 1997,
$53,728, $53,728 and $53,728, respectively, represent the actuarial
benefit to Mr. Pagon of premiums paid by Pegasus in connection with the
split dollar agreement entered into by Pegasus with the trustees of
insurance trust established by Mr. Pagon. See Certain Transactions --
Split Dollar Agreement. The remainder represents Pegasus' contributions
under its 401(k) plans.
(5) Nicholas A. Pagon became an employee of Pegasus on November 5, 1998.
Pegasus granted options to employees to purchase a total of 727,346 shares
during 1999. The amounts set forth below in the columns entitled "5%" and "10%"
represent hypothetical gains that could be achieved for the respective options
if exercised at the end of the option term. The gains are based on assumed
rates of stock appreciation of 5% and 10% compounded annually from the date the
respective options were granted to their expiration date.
Option Grants in 1999
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Stock Price
Appreciation
Individual Grants for Option Term
-------------------------------------------------------- -----------------------------
% of Total
Number of Options
Securities Granted to
Underlying Employees Exercise
Options in Fiscal Price Per Expiration
Name Granted Year Share Date 5% 10%
- -------------------------- ------------ ----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Marshall W. Pagon ........ 95,000 13.1% $ 39.500 5/4/2009 $2,359,927 $ 5,980,519
95,000 13.1% $ 80.875 12/17/2009 $4,831,876 $12,244,923
Robert N. Verdecchio ..... 45,000 6.2% $ 39.500 5/4/2009 $1,117,860 $ 2,832,877
25,000 3.4% $ 80.875 12/17/2009 $1,271,546 $ 3,222,348
Howard E. Verlin ......... 45,000 6.2% $ 39.500 5/4/2009 $1,117,860 $ 2,832,877
50,000 6.9% $ 80.875 12/17/2009 $2,543,093 $ 6,444,696
Ted S. Lodge ............. 45,000 6.2% $ 39.500 5/4/2009 $1,117,860 $ 2,832,877
40,000 5.5% $ 80.875 12/17/2009 $2,034,474 $ 5,155,757
Nicholas A. Pagon ........ 20,000 2.7% $ 39.500 5/4/2009 $ 496,827 $ 1,259,057
25,000 3.4% $ 80.875 12/17/2009 $1,271,546 $ 3,222,348
</TABLE>
118
<PAGE>
The table below shows aggregated stock option exercises by the named
executive officers in 1999 and 1999 year-end values. In-the-money options,
which are listed in the last two columns, are those in which the fair market
value of the underlying securities exceeds the exercise price of the option.
The closing price of Pegasus' Class A common stock on December 31, 1999 was
$97.75 per share.
Aggregated Option Exercises in 1999 and 1999 Year-End Option Values
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options
at Fiscal Year-End at Fiscal Year-End
------------------------ ------------------------------
Shares
Acquired on Value Exercis- Unexercis- Exercis- Unexercis-
Name Exercise Realized able able able able
- ------------------------------ ------------- ---------- --------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Marshall W. Pagon ............ 0 -- 76,500 283,500 $6,200,750 $14,812,375
Robert N. Verdecchio ......... 0 -- 38,180 111,820 $3,107,115 $ 6,466,010
Howard E. Verlin ............. 0 -- 38,180 136,820 $3,107,115 $ 6,887,885
Ted S. Lodge ................. 0 -- 48,180 136,820 $3,872,115 $ 7,484,135
Nicholas A. Pagon ............ 0 -- 8,000 77,000 $ 581,000 $ 3,910,875
</TABLE>
Compensation of Directors
Under Pegasus' by-laws, each director is entitled to receive such
compensation, if any, as may from time to time be fixed by the board of
directors. Pegasus currently pays its directors who are not employees or
officers of Pegasus an annual retainer of $10,000 plus $750 for each board
meeting attended in person, $350 for each meeting of a committee of the board
and $375 for each board meeting held by telephone. The annual retainer is
payable, at each director's option, in cash or in the form of options to
purchase Pegasus' Class A common stock. Pegasus also reimburses each director
for all reasonable expenses incurred in traveling to and from the place of each
meeting of the board or committee of the board.
On May 5, 1999, James J. McEntee, III, Mary C. Metzger, Donald W. Weber,
William P. Phoenix, Harry F. Hopper III, Michael C. Brooks, and Riordon B.
Smith, who were then all of Pegasus' nonemployee directors, each received
options to purchase 5,000 shares of Class A common stock under Pegasus' stock
option plan. Each option vests in annual installments of 2,500 shares, was
issued at an exercise price of $39.50 per share -- the closing price of the
Class A common stock at the time of the grant -- and is exercisable until the
tenth anniversary from the date of grants. On December 17, 1999, James J.
McEntee, III, Mary C. Metzger, Donald W. Weber, William P. Phoenix, Harry F.
Hopper III, Michael C. Brooks, and Riordon B. Smith, who were then all of
Pegasus' nonemployee directors, each received options to purchase 5,000 shares
of Class A common stock under Pegasus' stock option plan. Each option vests in
annual installments of 2,500 shares, was issued at an exercise price of $80.875
per share -- the closing price of the Class A common stock at the time of the
grant -- and is exercisable until the tenth anniversary from the date of grant.
Compensation Committee Interlocks and Insider Participation
During 1999, the board of directors generally made decisions concerning
executive compensation of executive officers. The board included Marshall W.
Pagon, the President and Chief Executive Officer of Pegasus, and Robert N.
Verdecchio, Pegasus' Senior Vice President and Chief Financial Officer. A
special stock option committee, however, made certain decisions regarding
option grants under the stock option plan. Both the stock option plan and
restricted stock plan are discussed below.
Incentive Program
The incentive program, which includes the restricted stock plan, the
401(k) plans and the stock option plan, is designed to promote growth in
stockholder value by providing employees with restricted stock awards in the
form of Class A common stock and grants of options to purchase Class A common
stock.
Restricted Stock Plan
For information with respect to the restricted stock option plan, see
Proposal 2: Amendment to Restricted Stock Plan.
119
<PAGE>
Stock Option Plan
For information with respect to the stock option plan, see Proposal 3:
Amendment to Stock Option Plan.
401(k) Plans
Effective January 1, 1996, Pegasus Media & Communications, Inc. adopted
the Pegasus Communications Savings Plan for eligible employees of that company
and its domestic subsidiaries. Effective October 1, 1996, the Pegasus' Puerto
Rico subsidiary adopted the Pegasus Communications Puerto Rico Savings Plan for
eligible employees of the Pegasus' Puerto Rico subsidiaries. Substantially all
Pegasus employees who, as of the enrollment date under the 401(k) plans, have
completed at least one year of service with Pegasus are eligible to participate
in one of the 401(k) plans. Participants may make salary deferral contributions
of 2% to 6% of salary to the 401(k) plans.
Pegasus may make three types of contributions to the 401(k) plans, each
allocable to a participant's account if the participant completes at least
1,000 hours of service in the applicable plan year, and is employed on the last
day of the applicable plan year:
o Pegasus matches 100% of a participant's salary deferral contributions to
the extent the participant invested his or her salary deferral
contributions in Class A common stock at the time of his or her initial
contribution to the 401(k) plans.
o Pegasus, in its discretion, may contribute an amount that equals up to
10% of the annual increase in company-wide location cash flow. These
company discretionary contributions, if any, are allocated to eligible
participants' accounts based on each participant's salary for the plan
year.
o Pegasus also matches a participant's rollover contribution, if any, to
the 401(k) plans, to the extent the participant invests his or her
rollover contribution in Class A common stock at the time of his or her
initial contribution to the 401(k) plans.
Pegasus makes discretionary company contributions and company matches of
employee salary deferral contributions and rollover contributions in the form
of Class A common stock, or in cash used to purchase Class A common stock.
Pegasus has authorized and reserved for issuance up to 205,000 shares of Class
A common stock in connection with the 401(k) plans. Company contributions to
the 401(k) plans are subject to limitations under applicable laws and
regulations.
All employee contributions to the 401(k) plans are fully vested at all
times and all company contributions, if any, vest 34% after two years of
service with Pegasus, including years before the 401(k) plans were established;
67% after three years of service; and 100% after four years of service. A
participant also becomes fully vested in company contributions to the 401(k)
plans upon attaining age 65 or upon his or her death or disability.
120
<PAGE>
CERTAIN TRANSACTIONS
Split Dollar Agreement
In December 1996, Pegasus entered into a split dollar agreement with the
trustees of an insurance trust established by Marshall W. Pagon. Under the
split dollar agreement, Pegasus agreed to pay a portion of the premiums for
certain life insurance policies covering Mr. Pagon owned by the insurance
trust. The agreement provides that Pegasus will be repaid for all amounts it
expends for such premiums, either from the cash surrender value or the proceeds
of the insurance policies. The actuarial benefit to Mr. Pagon of premiums paid
by Pegasus amounted to $53,728 in each of the years of 1997, 1998 and 1999.
Relationship with W.W. Keen Butcher and Affiliated Entities
Pegasus entered into an arrangement in 1998 with W.W. Keen Butcher, the
stepfather of Marshall W. Pagon and Nicholas A. Pagon, certain entities
controlled by him and the owner of a minority interest in one of the entities.
Under this agreement, Pegasus agreed to provide and maintain collateral for up
to $4.0 million in principal amount of bank loans to Mr. Butcher and the
minority owner. Mr. Butcher and the minority owner must lend or contribute the
proceeds of those bank loans to one or more of the entities owned by Mr.
Butcher for the acquisition of television broadcast stations to be programmed
by Pegasus pursuant to local marketing agreements.
Pegasus amended its agreement with W.W. Keen Butcher and his affiliated
entities in the fourth quarter of 1999 to increase the amount of collateral
that Pegasus will maintain for bank loans to Mr. Butcher and the affiliated
entities. Under the amendment, Pegasus will maintain collateral for up to $8.0
million in principal amount such bank loans. Mr. Butcher and the affiliated
entities must continue to contribute the proceeds from these bank loans to one
or more entities owned by Mr. Butcher for acquisition of television broadcast
stations to be programmed by Pegasus pursuant to local marketing agreement.
Under this arrangement, on November 10, 1998, Pegasus sold to one of the
Butcher companies the FCC license for the television station then known as WOLF
for $500,000 and leased certain related assets to the Butcher company,
including leases and subleases for studio, office, tower and transmitter space
and equipment, for ongoing rental payments of approximately $18,000 per year
plus operating expenses. WOLF is now known as WSWB and is one of the television
stations serving the northeastern Pennsylvania designated television market
area that is programmed by Pegasus. Mr. Butcher and the minority owner borrowed
the $500,000 under the loan collateral arrangement described above.
Concurrently with the closing under the agreement described above, one of the
Butcher companies assumed a local marketing agreement, under which Pegasus
provides programming to WSWB and retains all revenues generated from
advertising in exchange for payments to the Butcher company of $4,000 per month
plus reimbursement of certain expenses. The term of the local marketing
agreement is three years, with two three-year automatic renewals. The Butcher
company also granted Pegasus an option to purchase the station license and
assets if it becomes legal to do so for the costs incurred by the Butcher
company relating to the station, plus compound interest at 12% per year.
On July 2, 1998, Pegasus assigned to one of the Butcher companies its
option to acquire the FCC license for television station WFXU, which
rebroadcasts WTLH pursuant to a local marketing agreement with Pegasus. The
Butcher company paid Pegasus $50,000 for the option. In May 1999, the Butcher
company purchased the station and assumed the obligations under the local
marketing agreement with Pegasus. The Butcher company borrowed the $50,000
under the loan collateral arrangement, and granted Pegasus an option to
purchase the station on essentially the same terms described above for WOLF.
The local marketing agreement provides for a reimbursement of expenses by
Pegasus and a term of five years, with one automatic five-year renewal.
Pegasus currently provides programming under a local marketing agreement
to television station WPME. Under the local marketing agreement, Pegasus also
holds an option to purchase WPME. One of the Butcher companies expects to
acquire WPME and the FCC license from the current owner in the near future. The
Butcher company would continue the local marketing agreement with Pegasus and
Pegasus would retain its
121
<PAGE>
option to acquire WPME. Pegasus believes that the WOLF and WFXU transactions
were done at fair value and that any future transactions that may be entered
into with the Butcher companies or similar entities, including the WPME
transaction as described, will also be done at fair value.
Acquisition of Digital Television Services, Inc.
On April 27, 1998, Pegasus acquired Digital Television Services, Inc.
through the merger of a subsidiary of Pegasus into Digital Television Services.
Prior to the merger, Digital Television Services was the second largest
independent distributor of DIRECTV services serving 140,000 subscribers in 11
states.
In connection with the merger, Pegasus issued approximately 5.5 million
shares of its Class A common stock to the stockholders of Digital Television
Services and assumed approximately $159 million of liabilities. Pegasus also
granted registration rights to certain of Digital Television Service's
stockholders, including Columbia Capital Corporation, Columbia DBS, Inc.,
Whitney Equity Partners, L.P., Fleet Venture Resources, Inc. and its affiliates
and Harry F. Hopper III. Mr. Hopper received shares of Class A common stock in
the Digital Television Services merger and has an ownership interest in
Columbia Capital Corporation, which received 429,812 shares. As a result of the
Digital Television Services merger and the voting agreement described below,
Michael C. Brooks, Harry F. Hopper, III and Riordon B. Smith were elected to
Pegasus' board of directors.
Voting Agreement
On April 27, 1998, in connection with the Digital Television Services
merger, Pegasus, Marshall W. Pagon and a number of partnerships and
corporations controlled by him, and Fleet Venture Resources, Fleet Equity
Partners, Chisholm Partners III, L.P., Kennedy Plaza Partners, Whitney Equity
Partners, Columbia Capital Corporation and Columbia DBS, Inc. entered into a
voting agreement. The voting agreement covers all shares of Class B common
stock and other voting securities of Pegasus held at any time by Mr. Pagon and
his controlled entities and shares of Class A common stock received in the
Digital Television Services merger by Chisholm and the Fleet entities, Columbia
and Whitney. It provides that holders of such shares vote their respective
shares in the manner specified in the voting agreement. In particular, the
voting agreement establishes that Pegasus' board of directors will consist
initially of nine members: three independent directors, three directors
designated by Mr. Pagon and one director to be designated by each of Chisholm
Partners III, L.P., Columbia Capital Corporation and Whitney Equity Partners.
The voting agreement also provides that the committees of the board of
directors will consist of an audit committee, a compensation committee and a
nominating committee. Each committee shall consist of one independent director,
one director designated by Mr. Pagon and one director designated by a majority
of the directors designated by Chisholm Partners III, L.P., Columbia Capital
Corporation and Whitney Equity Partners. As a result of the voting agreement,
the parties to the agreement have sufficient voting power without the need for
the vote of any other shareholder, to elect the entire board of directors.
James J. McEntee, III, Mary C. Metzger, William P. Phoenix and Donald W. Weber
are serving as independent directors of Pegasus. Marshall W. Pagon and Robert
N. Verdecchio are serving as directors of Pegasus as designees of Mr. Pagon.
Harry F. Hopper III is serving as a director of Pegasus as a designee of
Columbia Capital Corporation; Michael C. Brooks is serving as a director of
Pegasus as a designee of Whitney Equity Partners; and Riordon B. Smith is
serving as a director of Pegasus as a designee of Chisholm Partners III, L.P.
The voting agreement terminates with respect to any covered share upon the
sale or transfer of any such share to any person other than a permitted
transferee. In addition, the right of Chisholm Partners III, L.P., Columbia
Capital Corporation and Whitney Equity Partners to designate a director
terminates when the Fleet entities, Columbia Capital Corporation and certain of
its owners, and Whitney Equity Partners cease owning one-half of the shares
originally received by each of them in the Digital Television Services merger
or in certain other circumstances. Whitney distributed shares it owned to its
partners in 1999 and, thus, has lost its right to designate a director under
the voting agreement. Columbia Capital Corporation and its subsidiaries and
owners have sold more than one-half of the shares originally received by them.
Columbia Capital Corporation has therefore also lost its right to designate a
director under the voting agreement. The voting agreement described above will
be amended and restated in connection with the merger, as described in The
Merger -- Voting Agreement.
122
<PAGE>
Communications License Re-Auction
Pegasus PCS Partners, a company owned and controlled by Marshall W. Pagon,
holds personal communications system licenses in Puerto Rico. We have made an
approximately $4.8 million investment in Pegasus PCS Partners. Pegasus itself
did not meet the qualification criteria for the FCC's re-auction in which
Pegasus PCS Partners acquired certain of its licenses.
CIBC World Markets Corp. and Affiliates
William P. Phoenix is a Managing Director of CIBC World Markets Corp. CIBC
World Markets and its affiliates have provided various services to Pegasus and
its subsidiaries since the beginning of 1997. CIBC World Markets has
historically performed a number of services for Pegasus, including serving as
one of the initial purchasers in Pegasus' January 2000 Rule 144A offering of
$300.0 million in aggregate liquidation preference of Series C convertible
preferred stock. In this capacity, CIBC World Markets received customary
underwriting discounts and commissions.
CIBC World Markets has also performed the following services for Pegasus:
o provided a fair market value appraisal in connection with the merger of
Digital Television Services, Inc. into a wholly-owned subsidiary of
Pegasus and the designation of Digital Television Services as a restricted
subsidiary;
o acted as a dealer manager in connection with an offer by Pegasus to
exchange its 121/2% Series A senior notes due 2007 for senior subordinated
notes of Digital Television Services and DTS Capital, Inc. and a related
consent solicitation;
o issued letters of credit in connection with bridge financing obtained by
Pegasus;
o provided fairness opinions to Pegasus and/or its affiliates in connection
with certain intercompany loans and other intercompany transactions;
o acted as lender in connection with the Pegasus Media & Communications
credit facility;
o provided a fairness opinion in connection with this merger;
o acted as Administrative Agent in connection with a credit facility of
Digital Television Services; and
o acted as underwriter in Pegasus' 1999 equity offering.
In addition, CIBC World Markets has agreed to purchase, subject to
definitive documentation, any and all Golden Sky notes tendered in response to
Golden Sky's offer to purchase such notes. CIBC World Markets will receive fees
of approximately $1.0 million under this arrangement.
In 2000 to date and during 1999, for services rendered, Pegasus or its
subsidiaries paid to CIBC World Markets an aggregate of $3.4 million and
$940,000, respectively, in fees. Pegasus believes that all fees paid to CIBC
World Markets in connection with the transactions described above were
customary. Pegasus anticipates that it or its subsidiaries may engage the
services of CIBC World Markets in the future, although no such engagement is
currently contemplated.
Investment in Personalized Media Communications, LLC and Licensing of Patents
On January 13, 2000, Pegasus made an investment in Personalized Media
Communications, LLC. Personalized Media is an advanced communications
technology company that owns as intellectual property portfolio consisting of
seven issued U.S. patents and over 10,000 claims submitted in several hundred
pending U.S. patent applications. A majority of pending claims are based on a
1981 filing date, with the remainder based on a 1987 filing date. Mary C.
Metzger, Chairman of Personalized Media and a member of Pegasus' board of
directors, and John C. Harvey, Managing Member of Personalized Media and Ms.
Metzger's husband, own a majority of and control Personalized Media as general
partners of the Harvey Family Limited Partnership.
123
<PAGE>
A subsidiary of Personalized Media granted Pegasus an exclusive license
for the distribution of satellite based services using Ku band BSS frequencies
at the 101, 110 and 119o West Longitude orbital locations and Ka band FSS
frequencies at the 99, 101, 103 and 125o West Longitude orbital locations,
which frequencies have been licensed by the FCC to affiliates of Hughes
Electronics Corporation. In addition, Personalized Media granted to Pegasus the
right to license on an exclusive basis and on favorable terms the patent
portfolio of Personalized Media in connection with other frequencies that may
be licensed to Pegasus in the future.
The license granted by Personalized Media's subsidiary provides rights to
all claims covered by Personalized Media's patent portfolio, including
functionality for automating the insertion of programming at a direct broadcast
satellite uplink, the enabling of pay-per-view buying, the authorization of
receivers, the assembly of records of product and service selections made by
viewers including the communication of this information to billing and
fulfillment operations, the customizing of interactive program guide features
and functions made by viewers and the downloading of software to receivers by
broadcasters. Pegasus will pay license fees to Personalized Media of $100,000
per year for three years.
Pegasus acquired preferred interests of Personalized Media for
approximately $14.3 million in cash, 200,000 shares of Pegasus' Class A common
stock and Pegasus' agreement, subject to certain conditions, to issue warrants
to purchase 1.0 million shares of Pegasus' Class A common stock at an exercise
price of $90.00 per share and with a term of ten years. After certain periods
of time, Personalized Media may redeem the preferred interests, and Pegasus may
require the redemption of preferred interests, in consideration for
Personalized Media's transfer to Pegasus of Personalized Media's ownership
interest in its wholly-owned subsidiary that holds the exclusive license from
Personalized Media for the rights that are licensed to Pegasus. Pegasus may
also be required to make an additional payment to Personalized Media if certain
contingencies occur that Pegasus believes are unlikely to occur. Because of the
speculative nature of the contingencies, it is not possible to estimate the
amount of any such additional payments, but in some cases it could be material.
As part of the transaction, Personalized Media will be entitled to designate
one nominee to serve on Pegasus' board of directors. Mary C. Metzger is
currently serving as Personalized Media's designee.
Other Transactions
In 1999, Pegasus loaned $199,999 to Nicholas A. Pagon, Pegasus' Vice
President of Broadcast Operations, bearing interest at the rate of 6% per
annum, with the principal amount due on the fifth anniversary of the date of
the promissory note. Mr. Pagon is required to use half of the proceeds of the
loan to purchase shares of Class A common stock, and the loan is collateralized
by those shares. The balance of the loan proceeds may be used at Mr. Pagon's
discretion.
124
<PAGE>
OWNERSHIP AND CONTROL
The following table sets forth share information as of January 31, 2000,
regarding the beneficial ownership of the Class A common stock and Class B
common stock by:
o each stockholder known to Pegasus to be the beneficial owner, as defined
in Rule 13d-3 under the Securities Exchange Act of 1934, of more than 5%
of the Class A common stock and Class B common stock, based upon Pegasus'
records or the records of the SEC;
o each Golden Sky stockholder who is anticipated to be the beneficial owner
of more than 5% of Pegasus' Class A common stock or Class B common stock
upon consummation of the merger;
o each director of Pegasus;
o each person who will be elected to Pegasus' board of directors upon
consummation of the merger;
o each of the top five most highly compensated officers whose total annual
salary and bonus or the fiscal year ended December 31, 1999 exceeded
$100,000; and
o all executive officers and directors of Pegasus as a group.
The information set forth below in the table and the footnotes thereto which
give effect to the consummation of the merger assumes that 6,500,000 shares of
Pegasus' Class A common stock in the aggregate will be issued to Golden Sky's
stockholders. The actual number of shares to be issued to Golden Sky's
stockholders upon consummation of the merger may differ from those presented
below. For information concerning the calculation of the number of shares to be
issued in the merger, see The Merger -- The Merger Agreement -- Conversion of
Golden Sky Capital Stock and The Merger -- The Merger Agreement -- Conversion
Ratios. The information set forth below does not give effect to any options
that may be issued by Pegasus to replace Golden Sky's outstanding options and
warrants upon consummation of the merger.
Holders of Class A common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders generally, and holders of Class B
common stock are entitled to ten votes per share. Shares of Class B common
stock are convertible into shares of Class A common stock on a one-for-one
basis, and accordingly, holders of Class B common stock are deemed to own the
same number of shares of Class A common stock. Pegasus Communications Holdings,
Inc., two of its subsidiaries and Pegasus Capital, L.P. hold in the aggregate
all shares of Class B common stock, representing on a fully diluted basis 20.8%
and 17.2% of the common stock before and after the merger, respectively, and
without giving effect to the voting agreement, 74.2 % and 67.6% of the combined
voting power of all voting stock before and after the consummation of the
merger, respectively. Without giving effect to the voting agreement, Marshall
W. Pagon is deemed to be the beneficial owner of all of the Class B common
stock; the table gives effect to the voting agreement. The outstanding capital
stock of Pegasus Communications Holdings, Inc. consists of 64,119 shares of
Class A voting common stock and 5,000 shares of non-voting stock, all of which
are beneficially owned by Marshall W. Pagon.
Unless otherwise provided, the address of each natural person is c/o
Pegasus Communications Management Company, 225 City Line Avenue, Suite 200,
Bala Cynwyd, Pennsylvania 19004.
125
<PAGE>
<TABLE>
<CAPTION>
Before Merger
------------------------------------------------------------------------------
Pegasus Class A Pegasus Class B
Common Stock Common Stock
Name and address of Beneficially Beneficially Voting
Beneficial Owner Owned Owned Power
- ------------------------------------ ----------------------------------------- ------------------------- --------
Shares % Shares % %
------------------------------ --------- ------------------ ----- --------
<S> <C> <C> <C> <C> <C>
Marshall W. Pagon(1) ............... 5,579,375(2)(3)(5) 27.8 4,581,900(3) 100 76.4
Robert N. Verdecchio ............... 322,552(5)(6)(7) 2.1 -- -- *
Howard E. Verlin ................... 100,698(6)(8) * -- -- *
Ted S. Lodge ....................... 94,199(9) * -- -- *
Nicholas A. Pagon .................. 13,941(10) * -- -- *
James J. McEntee, III .............. 16,170(11) * -- -- *
Mary C. Metzger .................... 210,500(12) 1.4 -- -- *
Donald W. Weber .................... 173,420(14) 1.1 -- -- *
William P. Phoenix ................. 170(15) * -- -- *
Harry F. Hopper III ................ 196,168(16) 1.3 -- -- *
Michael C. Brooks .................. 31,216(17) * -- -- *
Riordon B. Smith ................... 5,579,375(3)(18) 27.8 4,581,900(3) 100 76.4
Harron Communications
Corp.(19) ......................... 852,110 5.5 -- -- 1.4
T. Rowe Price Associates, Inc.
and related entities(20) .......... 1,400,000 9.1 -- -- 2.3
Wellington Management
Company, LLP(21) .................. 1,600,000 10.4 -- -- 2.6
PAR Capital Management,
Inc.(22) .......................... 950,000 6.2 -- -- 1.6
Fleet Venture Resources, Inc.
and related entities(23) .......... 5,579,375(3) 27.8 4,581,900(3) 100 76.4
Alta Communications VI, L.P.
and related entities(24) .......... -- -- -- -- --
Spectrum Equity Investors L.P.
and related entities(25) .......... -- -- -- -- --
Robert F. Benbow(26) ............... -- -- -- -- --
William P. Collatos(27) ............ -- -- -- -- --
Directors and executive officers
as a group(28) (consists of 13
persons before the merger and
14 persons after the merger) ...... 6,618,500 32.6 4,581,900 100 77.8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
After Merger
-------------------------------------------------------------------------------
Pegasus Class A Pegasus Class B
Common Stock Common Stock
Name and address of Beneficially Beneficially Voting
Beneficial Owner Owned Owned Power
- ------------------------------------ ----------------------------------------- ------------------------- ---------
Shares % Shares % %
------------------------------ --------- ------------------ ----- ---------
<S> <C> <C> <C> <C> <C>
Marshall W. Pagon(1) ............... 8,318,649(2)(4)(5) 31.3 4,581,900(4) 100 73.1
Robert N. Verdecchio ............... 322,552(5)(6)(7) 1.5 -- -- *
Howard E. Verlin ................... 100,698(6)(8) * -- -- *
Ted S. Lodge ....................... 94,199(9) * -- -- *
Nicholas A. Pagon .................. 13,941(10) * -- -- *
James J. McEntee, III .............. 16,170(11) * -- -- *
Mary C. Metzger .................... 1,210,500(13) 5.3 -- -- *
Donald W. Weber .................... 173,420(14) * -- -- *
William P. Phoenix ................. 170(15) * -- -- *
Harry F. Hopper III ................ 196,168(16) * -- -- *
Michael C. Brooks .................. 31,216(17) * -- -- *
Riordon B. Smith ................... 8,318,649(4)(18) 31.6 4,581,900(4) 100 73.1
Harron Communications
Corp.(19) ......................... 852,110 3.9 -- -- 1.3
T. Rowe Price Associates, Inc.
and related entities(20) .......... 1,400,000 6.4 -- -- 2.1
Wellington Management
Company, LLP(21) .................. 1,600,000 7.3 -- -- 2.4
PAR Capital Management,
Inc.(22) .......................... 950,000 4.3 -- -- 1.4
Fleet Venture Resources, Inc.
and related entities(23) .......... 8,318,649(4) 31.3 4,581,900(4) 100 73.1
Alta Communications VI, L.P.
and related entities(24) .......... 8,318,649(4) 31.3 4,581,900(4) 100 73.1
Spectrum Equity Investors L.P.
and related entities(25) .......... 8,318,649(4) 31.3 4,581,900(4) 100 73.1
Robert F. Benbow(26) ............... 8,318,649(4) 31.3 4,581,900(4) 100 73.1
William P. Collatos(27) ............ 8,318,649(4) 31.3 4,581,900(4) 100 73.1
Directors and executive officers
as a group(28) (consists of 13
persons before the merger and
14 persons after the merger) ...... 10,325,558 37.2 4,581,900 100 74.7
</TABLE>
- ------------
* Represents less than 1% of the outstanding shares of Class A common stock or
less than 1% of the voting power, as applicable.
(1) Pegasus Capital, L.P. holds 1,217,348 shares of Class B common stock. Mr.
Pagon is the sole shareholder of the general partner of Pegasus Capital,
L.P. and is deemed to be the beneficial owner of these shares. All of the
3,364,552 remaining shares of Class B common stock are owned by Pegasus
Communications Holdings, Inc. and two of its subsidiaries. All the capital
stock of Pegasus Communications Holdings, Inc. are held by Pegasus
Communications Limited Partnership. Mr. Pagon controls Pegasus
Communications Limited Partnership by reason of his ownership of all the
outstanding voting stock of the sole general partner of a limited
partnership that is, in turn, the sole general partner in Pegasus
Communications Limited Partnership. Therefore, apart from the voting
agreement described in note 3 below, and the voting agreement as it will
be amended and restated described in note 4 below, Mr. Pagon is the
beneficial owner of 100% of Class B common stock with sole voting and
investment power over all such shares.
(2) Includes 4,581,900 shares of Class B common stock, which are convertible
into shares of Class A common stock on a one-for-one basis and 139,411
shares of Class A common stock which are issuable upon the exercise of the
vested portion of outstanding stock options.
(3) Prior to the closing of the merger, the following persons are parties to a
voting agreement:
o Marshall W. Pagon;
o Pegasus, Pegasus Capital, L.P., Pegasus Communications Holdings, Inc.,
Pegasus Scranton Offer Corp, and Pegasus Northwest Offer Corp;
126
<PAGE>
o Fleet Venture Resources, Inc., Fleet Equity Partners VI, L.P., Chisholm
Partners III, L.P. and Kennedy Plaza Partners (which are discussed in
note 23 below).
The voting agreement provides that these parties vote all shares held by them
in the manner specified in the voting agreement. As a consequence of being
parties to the voting agreement, each of these parties is deemed to have
shared voting power over certain shares beneficially owned by them in the
aggregate for the purposes specified in the voting agreement. Therefore,
the parties to the voting agreement are each deemed to be the beneficial
owner with respect to 4,581,900 shares of Class B common stock and
8,318,649 shares of Class A common stock, including 4,581,900 shares of
Class A common stock issuable upon conversion of the all outstanding shares
of Class B common stock.
(4) Upon the closing of the merger, the following parties will have entered
into the amended and restated voting agreement:
o Marshall W. Pagon;
o Pegasus, Pegasus Capital, L.P., Pegasus Communications Holdings, Inc.,
Pegasus Scranton Offer Corp, and Pegasus Northwest Offer Corp;
o Fleet Venture Resources, Inc., Fleet Equity Partners VI, L.P., Chisholm
Partners III, L.P. and Kennedy Plaza Partners;
o Alta Communications VI, L.P., Alta Subordinated Debt Partners III,
L.P., and Alta-Comm S By S, LLC (which are discussed in note 24 below);
and
o Spectrum Equity Investors, L.P. and Spectrum Equity Investors II, L.P.
(which are discussed in note 25 below).
As amended and restated, the voting agreement will provide that these parties
vote all shares held by them in the manner specified in the voting
agreement. As a consequence of being parties to the voting agreement, each
of these parties will be deemed to have shared voting power over certain
shares beneficially owned by them in the aggregate for the purposes
specified in the voting agreement. Therefore, the parties to the voting
agreement will each be deemed to be the beneficial owner with respect to
4,581,900 shares of Class B common stock and 3,736,749 shares of Class A
common stock, including 4,581,900 shares of Class A common stock issuable
upon conversion of the all outstanding shares of Class B common stock and
139,411 shares of Class A common stock issuable upon the exercise of the
vested portion of stock options. See The Merger -- Voting Agreement.
(5) This includes 120,009 shares of Class A common stock held in Pegasus'
401(k) plan, over which Messrs. Pagon and Verdecchio share voting power in
their capacities as co-trustees.
(6) On March 26, 1997, the SEC declared effective a registration statement
filed by Pegasus, which would permit Messrs. Verdecchio and Verlin to sell
certain shares of their Class A common stock subject to certain vesting
and other restrictions. Messrs. Verdecchio and Verlin have sole voting and
investment power over their shares, subject to certain vesting
restrictions.
(7) This includes 67,270 shares of Class A common stock which are issuable
upon the exercise of the vested portion of outstanding stock options.
(8) This includes 49,090 shares of Class A common stock which are issuable
upon the exercises of the vested portion of outstanding stock options.
(9) This includes 1,500 shares of Class A common stock owned by Mr. Lodge's
wife, for which Mr. Lodge disclaims beneficial ownership, and 87,270
shares of Class A common stock which are issuable upon the exercise of the
vested portion of outstanding stock options.
(10) This includes 8,000 shares of Class A common stock which are issuable upon
the exercise of the vested portion of outstanding stock options.
(11) This includes 10,170 shares of Class A common stock which are issuable
upon the exercise of the vested portion of outstanding stock options and
1,000 shares held beneficially by Mr. McEntee's wife, for which Mr.
McEntee disclaims beneficial ownership.
(12) This includes 200,000 shares of Class A common stock received in the
investment of Pegasus in Personalized Media & Communications, LLC, of
which Ms. Metzger is Chairman. See Business of Pegasus -- Completed
Transactions. Also includes 7,000 shares of Class A common stock, which
are issuable upon the exercise of the vested portion of the outstanding
stock options.
127
<PAGE>
(13) In addition to the amounts listed in note 12, this includes warrants
exercisable by Personalized Media Communications LLC for 1,000,000 shares
of Class A common stock.
(14) This includes 13,385 shares of Class A common stock issuable upon the
exercise of the vested portion of outstanding stock options.
(15) This consists of 170 shares of Class A common stock issuable upon the
exercise of the vested portion of outstanding stock options.
(16) This includes 170 shares of Class A common stock issuable upon the
exercise of the vested portion of outstanding stock options, and 4,750
shares held by the Hopper Family Foundation, of which Mr. Hopper is a
trustee and officer. The address of this person is c/o Columbia Capital
Corporation, 201 N. Union Street, Suite 300, Alexandria, Virginia
22314-2642.
(17) This includes 170 shares of Class A common stock issuable upon the
exercise of the vested portion of outstanding stock options. The address
of this person is 177 Broad Street, Stamford, Connecticut 06901.
(18) The information for Mr. Smith includes all shares of Class A common stock
held by Fleet Venture Resources, Inc. and its related entities, as
described below in note 23. Mr. Smith is a Senior Vice President of each
of the managing general partners of Fleet Equity Partners VI, a Senior
Vice President of Fleet Venture Resources, a Senior Vice President of the
corporation that is the general partner of the partnership that is the
general partner of Chisholm Partners III, and a partner of Kennedy Plaza
Partners. As a Senior Vice President of Fleet Growth Resources II, Inc.
and Silverado IV Corp., the two general partners of Fleet Equity Partners,
and as a Senior Vice President of Fleet Venture Resources and Silverado
III Corp., the general partner of the partnership Silverado III, L.P.,
which is the general partner of Chisholm Partners III, and as a partner of
Kennedy Plaza Partners, Mr. Smith disclaims beneficial ownership for all
shares held directly by those entities, except for his pecuniary interest
therein. The address of this person is 50 Kennedy Plaza, RI MO F12C,
Providence, Rhode Island 02903.
(19) The address of Harron Communications Corp, is 70 East Lancaster Avenue,
Frazer, Pennsylvania 19355.
(20) The address of T. Rowe Price Associates is 100 East Pratt St., Baltimore,
Maryland 21202.
(21) The address of Wellington Management Company is 75 State Street, Boston,
Massachusetts 02109.
(22) The address of this entity is Suite 1600, One Financial Center, Boston,
Massachusetts 02111.
(23) This includes the following number of shares of Class A common stock held
by the designated entity: Fleet Venture Resources, Inc. (406,186); Fleet
Equity Partners VI, L.P. (174,079); Chisholm Partners III, L.P. (147,611);
and Kennedy Plaza Partners (10,179). The address of each of these entities
is 50 Kennedy Plaza, RI MO F12C, Providence, Rhode Island 02903.
(24) The address of each of these entities is c/o Alta Communications, Inc.,
One Embarcadero Center, Suite 4050, San Francisco, California 94111, Attn:
Robert Benbow. Alta Subordinated Debt Partners III, L.P. is managed by
Burr, Egan, Deleage & Co. Alta Communications VI, L.P. and Alta-Comm S by
S, LLC are managed by Alta Communications, Inc. The general partner of
Alta Subordinated Debt Partners III and the general partner of Alta
Communications VI exercise sole voting and investment power with respect
to the securities held by their respective funds. The general partners of
Alta Subordinated Debt Management III, L.P., which is the general partner
of Alta Subordinated Debt Partners III, include Messrs. Craig Burr,
William P. Egan, Brian McNeill, Robert Benbow, Timothy Dibble, Jean
Deleage, Jonathan Flint and Eileen McCarthy. These general partners may be
deemed to share voting and investment power for the shares held by Alta
Subordinated Debt Partners III. The general partners of Alta
Communications VI Management Partners, L.P., which is the general partner
of Alta Communications VI, include Messrs. William P. Egan, Brian McNeill,
Robert Benbow, Timothy Dibble, David Retik and Eileen McCarthy. These
general partners may be deemed to share voting and investment powers for
the shares held by Alta Communications VI. These general partners disclaim
beneficial ownership of all securities held by the funds except to the
extent of their proportionate pecuniary interests in the shares. Some of
the principals of Burr, Egan, Deleage & Co. and Alta Communications, Inc.,
including some of the individuals identified above, are members of
Alta-Comm S by S, which invests alongside Alta Communications VI. As
members of Alta-Comm S by S, they may be deemed to share voting and
investment power for the shares held by Alta-Comm S by S. These principals
disclaim beneficial ownership of all of these shares except to the extent
of their proportionate pecuniary interest in the shares.
128
<PAGE>
(25) The address of each of these entities is One International Place, 29th
Floor, Boston, Massachusetts 02110, Attn: William P. Collatos. The sole
general partner of Spectrum Equity Investors, L.P. is Spectrum Equity
Associates, L.P., a limited partnership whose general partners are Messrs.
Brion B. Applegate and William P. Collatos. The sole general partner of
Spectrum Equity Investors II, L.P. is Spectrum Equity Associates II, L.P.,
a limited partnership whose general partners are Messrs. Brion B.
Applegate, William P. Collatos and Kevin J. Maroni. Messrs. Applegate and
Collatos may be deemed to share beneficial ownership of the shares owned
by Spectrum Equity Investors, L.P., and Messrs. Applegate, Collatos and
Maroni may be deemed to share beneficial ownership of the shares owned by
Spectrum Equity Investors II, L.P. These individuals disclaim beneficial
ownership of all of these shares except to the extent of their respective
pecuniary interests in its shares.
(26) The address of this person is c/o Alta Communications, Inc., One
Embarcadero Center, Suite 4050, San Francisco, California 94111. The
shares are held of record by Alta Subordinated Debt Partners III, L.P.,
Alta Communications VI, L.P. and Alta-Comm S by S, LLC. Mr. Benbow is a
general partner of the respective general partners of Alta Subordinated
Debt Partners III and Alta Communications VI. As a general partner, he may
be deemed to share voting and investment power with respect to the shares
held by the funds. Mr. Benbow disclaims beneficial ownership of the shares
held by these funds except to the extent of his proportionate pecuniary
interest in the shares. Mr. Benbow also disclaims beneficial ownership of
all shares held by Alta-Comm S by S of which he is not a member.
(27) The address of this person is c/o Spectrum Equity Investors, One
International Place, 29th Floor, Boston, Massachusetts 02110. The shares
are held of record by Spectrum Equity Investors L.P. and Spectrum Equity
Investors II L.P., which may be deemed to be beneficially owned by Mr.
Collatos.
(28) For information relating to the period before the merger, see notes 1, 2
and 5 with respect to Mr. Marshall W. Pagon, notes 5, 6, 7, 8, 9, and 10
with respect to Messrs. Verdecchio, Verlin, Lodge and Nicholas A. Pagon,
notes 11, 12, 14, 15, 16, 17 and 18 with respect to Ms. Metzger and
Messrs. McEntee, Phoenix, Hopper, Brooks and Smith, and note 3 with
respect to the voting agreement currently in place. For information
relating to after the merger, also see note 13 with respect to Ms.
Metzger, notes 26 and 27 with respect to Messrs. Benbow and Collatos, and
note 4 with respect to the voting agreement as amended and restated in
connection with the merger. Also includes 100 shares of Class A common
stock which are issuable upon the vested portion of outstanding stock
options.
129
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of:
o 50,000,000 shares of Class A common stock, par value $.01 per share;
o 15,000,000 shares of Class B common stock, par value $.01 per share;
o 20,000,000 shares of non-voting common stock, par value $.01 per share;
and
o 5,000,000 shares of preferred stock, par value $.01 per share.
Of the 5,000,000 shares of preferred stock that we are authorized to
issue, approximately 143,684 shares have been designated as Series A preferred
stock, 5,707 shares have been designated as Series B junior convertible
participating preferred stock, 3,000,000 shares have been designated as Series
C convertible preferred stock, 22,500 shares have been designated as Series D
junior convertible participating preferred stock and 10,000 shares have been
designated as Series E junior convertible participating preferred stock. As of
February 25, 2000, we had outstanding 15,895,968 shares of Class A common stock
and 4,581,900 shares of Class B common stock. None of our non-voting common
stock is issued and outstanding.
The following summary description relating to our capital stock sets forth
the material terms of our capital stock. This summary is not intended to be
complete. It is subject to, and qualified in its entirety by reference to, our
amended and restated certificate of incorporation and the certificates of
designation for the different series of preferred stock.
Description of Common Stock
For more information with respect to our common stock, see Comparison of
Stockholders' Rights.
Description of Series A Preferred Stock
General. The following is a summary of certain terms of the Series A
preferred stock. The terms of the Series A preferred stock are set forth in the
certificate of designation. This summary is not intended to be complete and is
subject to, and qualified in its entirety by reference to, Pegasus' amended and
restated certificate of incorporation and the certificate of designation.
Pegasus' amended and restated certificate of incorporation and the Series A
certificate of designation are filed with the SEC as exhibits to the
registration statement of which this proxy statement/prospectus is a part.
Pursuant to the certificate of designation, we have issued approximately
143,684 shares of Series A preferred stock with a liquidation preference of
$1,000 per share. This includes shares issued to pay in-kind dividends on the
Series A preferred stock. On January 1, 2007, we must redeem, subject to the
legal availability of funds, all outstanding shares of Series A preferred stock
at a price in cash equal to the liquidation preference, plus accrued and unpaid
dividends, if any, to the date of redemption.
Dividends. The holders of shares of the Series A preferred stock are
entitled to receive, as dividends are declared by the board of directors out of
funds legally available, cumulative preferential dividends from the issue date
of the Series A preferred stock accruing at the rate per share of 12 3/4% per
annum, payable semi-annually in arrears on January 1 and July 1 of each year.
Accumulated unpaid dividends bear interest at a per annum rate 200 basis points
in excess of the annual dividend rate on the Series A preferred stock.
Dividends are payable in cash, except that on or prior to January 1, 2002,
dividends may be paid, at our option, by the issuance of additional shares of
Series A preferred stock having an aggregate liquidation preference equal to
the amount of such dividends.
Optional Redemption. We do not have the option to redeem Series A
preferred stock until after January 1, 2002. We may redeem the Series A
preferred stock after that date, starting at 106.375% of the liquidation
preference during the 12-month period beginning January 1, 2002 and declining
annually to 100.000% of the liquidation preference on January 1, 2005 and
thereafter.
Change of Control. Upon the occurrence of a change of control of Pegasus,
each holder of shares of Series A preferred stock will have the right to
require us to repurchase all or any part of such holder's Series
130
<PAGE>
A preferred stock at an offer price in cash equal to 101% of the aggregate
liquidation preference of the preferred stock the holder wishes to sell, plus
accrued and unpaid dividends, if any, to the date of purchase. Generally, a
change of control means the occurrence of any of the following:
o the sale of all or substantially all of our assets to any person other
than Marshall W. Pagon or his related parties as described in the
certificate of designation;
o the adoption of a plan relating to the liquidation or dissolution of
Pegasus;
o the consummation of any transaction in which a person becomes a
beneficial owner of more of our Class A common stock than is beneficially
owned at such time by Mr. Pagon and his related parties;
o the consummation of any transaction in which Mr. Pagon and his related
parties cease to have at least 30% of the combined voting power of all our
voting stock or Mr. Pagon and his affiliates acquire beneficial ownership
of more than 66 2/3% of our Class A common stock; or
o the first day on which a majority of the members of our board of
directors are not continuing directors -- essentially, directors elected
or recommended by the current board of directors or their designated
replacements.
Certain Covenants. The certificate of designation contains a number of
covenants restricting our operations and those of our subsidiaries. For
example, the covenants limit Pegasus' ability to issue capital stock ranking on
parity with or senior to the Series A preferred stock, and the ability of
Pegasus and its subsidiaries to incur additional indebtedness, pay dividends or
make distributions, make certain investments, issue subsidiary stock, enter
into certain consolidations or mergers and enter into certain transactions with
affiliates.
Description of Series B, Series D and Series E Junior Convertible Participating
Preferred Stock
General. The following is a summary of certain terms of the Series B,
Series D and Series E junior convertible participating preferred stock. The
terms of the Series B, Series D and Series E junior convertible participating
preferred stock are set forth in the respective certificates of designation.
This summary is not intended to be complete and is subject to, and qualified in
its entirety by reference to, Pegasus' amended and restated certificate of
incorporation and the certificates of designation which are filed with the SEC
as exhibits to the registration statement of which this proxy
statement/prospectus is a part.
Under the respective certificates of designation, the following number of
shares of Series B, Series D and Series E junior convertible participating
preferred stock, each with a liquidation preference of $1,000 per share plus
any accrued but unpaid dividends, have been issued:
o 5,707 shares of Series B junior convertible participating preferred
stock;
o 22,500 shares of Series D junior convertible participating preferred
stock; and
o 10,000 shares of Series E junior convertible participating preferred
stock.
With respect to dividend distributions the Series B, Series D and Series E
junior convertible participating preferred stock rank senior to all classes of
our common stock, junior to the Series A preferred stock and Series C
convertible preferred stock, and on a parity with each other. In the event of a
liquidation, the Series B, Series D and Series E junior convertible
participating preferred stock will rank, to the extent of their respective
liquidaiton preferences, junior to the Series A preferred stock and Series C
convertible preferred stock, senior to the common stock and on parity with each
other. The Series B, Series D and Series E preferred stock will also share pro
rata with the common stock, each other and all other series of participating
preferred stock after the common stock has received an amount equal to the sum
of the liquidation preferences of all outstanding series of participating
preferred stock.
131
<PAGE>
Voting Rights. Holders of Series B, Series D and Series E junior
convertible participating preferred stock will have no voting rights with
respect to general corporate matters except as provided by Delaware law. They
have no right to consent or withhold consent to any of the proposals described
herein.
Dividends. The holders of shares of the Series B, Series D and Series E
junior convertible participating preferred stock are entitled to receive, when,
as and if declared by our board of directors out of funds legally available,
cumulative preferential cash dividends in the amount of $1.4 million per year
in the aggregate for all series.
Conversion Rights. Each share of Series B, Series D and Series E junior
convertible participating preferred stock will be convertible at any time at
the option of the holder into that number of whole shares of our Class A common
stock as is equal to the stated liquidation preference of $1,000 per share,
divided by an initial conversion price, subject to adjustment upon the
occurrence of specified events. As a result, each share of Series B, and Series
D junior convertible participating preferred stock will initially be
convertible into 16.24, and 9.77 shares of Class A common stock, respectively.
The conversion ratio of the Series E junior convertible participating perferred
stock will be approximately 10.78.
Redemption. At our option, we may redeem all, but not less than all, of
the outstanding shares of Series B junior convertible participating preferred
stock at any time after January 4, 2005 at a price per share equal to $1,000
plus any accrued but unpaid dividends, if any, whether or not declared. At the
option of the holders of all of the Series B junior convertible participating
preferred stock, they may require us to redeem all, but not less than all, of
the outstanding shares of Series B junior convertible participating preferred
stock at any time after January 4, 2002. The redemption will be at a price per
share equal to $1,000 plus any accrued but unpaid dividends, if any, whether or
not declared.
At our option, we may redeem all, but not less than all, of the
outstanding shares of Series D junior convertible participating preferred stock
at any time at a price per share equal to $1,000 plus any accrued but unpaid
dividends, if any, whether or not declared. At the option of the holders of all
outstanding shares of Series D junior convertible participating preferred
stock, they may require us to redeem 10,000 of the outstanding shares at any
time after March 1, 2000, an additional 6,125 of the outstanding shares at any
time after February 1, 2002, and the remainder of the outstanding shares at any
time after February 1, 2003. The redemption will be at a price per share equal
to $1,000 plus any accrued but unpaid dividends, if any, whether or not
declared.
At our option, we may redeem all, but not less than all, of the
outstanding shares of Series E junior convertible participating preferred stock
at any time until February 2001 for $1,100 per share, and thereafter for $1,000
per share, in both cases plus accrued but unpaid dividends, if any, whether or
not declared. At the option of the holders of all outstanding shares of Series
E junior convertible participating preferred stock, they may require us to
redeem 5,000 of the oustanding shares beginning in February 2002, and the
remaining 5,000 shares beginning in February 2003. The redemption price will be
$1,000 per share plus accrued but unpaid dividends, if any, whether or not
declared.
However, we will not be obligated to redeem any of the Series B, Series D
and Series E junior convertible participating preferred stock unless at the
time we are able to do so in compliance with the certificates of designation
for our Series A preferred stock and Series C convertible preferred stock, our
indentures and any subsequent certificate of designation, indenture or similar
agreement which limits our ability to redeem the Series B, Series D and Series
E junior convertible participating preferred stock.
Description of Series C Convertible Preferred Stock
General. The following is a summary of certain terms of the Series C
convertible preferred stock. The terms of the Series C convertible preferred
stock are set forth in the certificate of designation. This summary is not
intended to be complete and is subject to, and qualified in its entirety by
reference to, Pegasus' amended and restated certificate of incorporation and
the certificate of designation, which are filed with the SEC as exhibits to the
registration statement of which this proxy statement/prospectus is a part.
Pursuant to the certificate of designation, 3,000,000 shares of Series C
convertible preferred stock, with a liquidation preference of $100 per share
plus any accrued but unpaid dividends, have been issued. With respect to
dividend distributions and distributions upon liquidation, winding-up and
dissolution, the Series C convertible preferred stock ranks junior to our
Series A preferred stock and senior to our Series B, D and E preferred stock
all classes of our common stock.
132
<PAGE>
Voting Rights. Holders of Series C convertible preferred stock will have
no voting rights with respect to general corporate matters except as provided
by Delaware law or, in limited circumstances, as provided in the certificate of
designation relating to the Series C convertible preferred stock.
Dividends. The holders of shares of the Series C convertible preferred
stock are entitled to receive, when, as and if declared by our board of
directors out of funds legally available, cumulative preferential dividends
from the issue date of the Series C convertible preferred stock. These
dividends will accrue at an annual rate of 61/2% of the liquidation preference
of $100 per share, payable quarterly in arrears. Dividends are payable in cash
or, at our option, in shares of our Class A common stock or a combination
thereof.
Conversion Rights. Each share of Series C convertible preferred stock will
be convertible at any time at the option of the holder into that number of
whole shares of our Class A common stock as is equal to the stated liquidation
preference of $100 per share, divided by an initial conversion price of $127.50
subject to adjustment upon the occurrence of specified events. As a result,
each share of Series C convertible preferred stock will initially be
convertible into 0.7843 shares of Class A common stock.
Optional Redemption. Beginning February 1, 2003, we may redeem the Series
C convertible preferred stock at redemption premiums set forth in the
certificate of designation plus accumulated and unpaid dividends, if any.
Special Redemption. On or after August 1, 2001 but prior to February 1,
2003, we may redeem the Series C convertible preferred stock at a redemption
premium of 105.525% plus accumulated and unpaid dividends. We may only do this
if the trading price of the Series C convertible preferred stock equals or
exceeds $191.25 for a specified trading period.
Change of Control. In the event of a "change of control" of Pegasus, as
that term is defined in the certificate of designation, holders of the Series C
convertible preferred stock will, in the event that the market price per share
of our Class A common stock at such time is less than the conversion price of
the Series C convertible preferred stock, have a one-time option to convert
such holder's shares of Series C convertible preferred stock into shares of our
Class A common stock at a conversion price equal to the greater of:
o the market price per share of our Class A common stock as of the date of
the change of control; or
o $68.00 per share.
In lieu of issuing the shares of our Class A common stock issuable upon
conversion in the event of a change of control, we may, at our option, make a
cash payment equal to the market value of the shares of our Class A common
stock otherwise issuable.
133
<PAGE>
COMPARISON OF STOCKHOLDER'S RIGHTS
If the merger is consummated, holders of Golden Sky's capital stock will
become holders of Pegasus' Class A common stock. Thereafter, the rights of such
holders will be governed by Pegasus' amended and restated certificate of
incorporation, the certificates of designation of Pegasus' Series A preferred
stock, Series B junior convertible participating preferred stock, Series C
convertible preferred stock, Series D junior convertible participating
preferred stock, Series E junior convertible participating preferred stock and
Pegasus' by-laws.
The rights of holders of Pegasus' Class A common stock differ in certain
respects from the rights of Golden Sky's stockholders. Without accounting for
the merger, certain of the material differences are summarized below. This
summary is qualified in its entirety by reference to the full text of:
o Pegasus's amended and restated certificate of incorporation and
certificates of designation;
o Pegasus' bylaws;
o the voting agreement;
o Golden Sky's amended and restated certificate of incorporation, including
the certificates of designation of Golden Sky's Series A convertible
participating preferred stock, Series A redeemable preferred stock, Series
B convertible participating preferred stock, Series B redeemable preferred
stock, Series C senior convertible preferred stock and Series D redeemable
preferred stock;
o Golden Sky's bylaws;
o Golden Sky's stockholder agreement, dated as of November 24, 1997, among
certain holders of common stock and the holders of Series A convertible
participating preferred stock and Series B convertible participating
preferred stock; and
o Golden Sky's Stock and Warrant Purchase Agreement, dated as of January 4,
2000, by and among Golden Sky Holdings and the investors identified
therein.
State of Incorporation
Both Pegasus and Golden Sky are incorporated in the State of Delaware and
are subject to the provisions of the Delaware General Corporation Law.
Authorized Capital
Pegasus' authorized capital stock consists of:
o 50,000,000 shares of Class A common stock, par value $.01 per share;
o 15,000,000 shares of Class B common stock, par value $.01 per share;
o 20,000,000 shares of non-voting common stock, par value $.01 per share;
and
o 5,000,000 shares of preferred stock, par value $.01 per share.
Of the 5,000,000 shares of preferred stock that we are authorized to
issue, approximately 143,684 shares have been designated as Series A preferred
stock, 5,707 shares have been designated as Series B junior convertible
preferred stock, 3,000,000 shares have been designated Series C convertible
preferred stock, 22,500 shares have been designated as Series D junior
convertible participating preferred stock and 10,000 shares will be designated
as Series E junior convertible participating preferred stock. As of February
25, 2000, Pegasus had outstanding 15,895,968 shares of Class A common stock and
4,581,900 shares of Class B common stock. None of our non-voting common stock
is issued and outstanding.
Golden Sky's authorized capital stock consists of:
o 1,000,000 shares of common stock, par value $.01 per share; and
o 1,593,000 shares of preferred stock, par value $.01 per share.
Of the 1,593,000 shares of preferred stock that Golden Sky is authorized
to issue:
134
<PAGE>
o 418,000 shares have been designated as Series A convertible participating
preferred stock, all of which are issued and outstanding;
o 418,000 shares have been designated as Series A redeemable preferred
stock, none of which are issued and outstanding;
o 228,500 shares have been designated as Series B convertible participating
preferred stock, 228,442 of which are issued and outstanding;
o 228,500 shares have been designated as Series B redeemable preferred
stock, none of which are issued and outstanding;
o 51,000 shares have been designated as Series C senior convertible
preferred stock, all of which are issued and outstanding; and
o 100,000 shares have been designated as Series D redeemable preferred
stock, none of which are issued and outstanding.
As of January 25, 2000, Golden Sky had outstanding 25,399 shares of its
common stock.
Voting, Liquidation, and Other Rights
With regard to Pegasus, the voting powers, preferences and relative rights
of the Class A common stock, Class B common stock and non-voting common stock
are identical in all respects, except that:
o the holders of Class A common stock are entitled to one vote per share,
the holders of Class B common stock are entitled to ten votes per share
and the holders of non-voting common stock have no voting rights except as
provided by law;
o stock dividends on Class A common stock may be paid only in shares of
Class A common stock or non-voting common stock, stock dividends on Class
B common stock may be paid only in shares of Class B common stock or
non-voting common stock, and stock dividends on non-voting common stock
may be paid only in shares of non-voting common stock; and
o shares of Class B common stock have certain conversion rights and are
subject to certain restrictions on ownership and transfer. See --
Conversion Rights and Transfer Restrictions.
Except as described below or as required by law, holders of Class A common
stock and Class B common stock vote together on all matters presented to the
stockholders for their vote or approval, including the election of directors.
See -- Class Voting. Holders of non-voting common stock are not entitled to
vote on amendments to Pegasus' certificate of incorporation, whether such
amendment increases or decreases the number of shares of non-voting common
stock, or otherwise. Where holders of non-voting common stock are entitled to a
vote by law, they are entitled to one vote per share, and they will vote
together as a single class with the holders of the Class A common stock and
Class B common stock, unless the law requires a separate vote. For a
description of the voting rights accorded holders of Pegasus' preferred stock,
see Description of Capital Stock.
In the event of a merger or consolidation to which Pegasus is a party,
each share of Class A common stock, Class B common stock and non-voting common
stock will be entitled to receive the same consideration, except that, in a
merger in which Pegasus is not the surviving corporation, holders of Class B
common stock may receive stock with greater voting power in lieu of stock with
lesser voting power received by holders of the Class A common stock, and
holders of non-voting common stock may receive stock with no voting rights.
Subject to any rights of holders of Pegasus' preferred stock, all holders
of common stock, regardless of class, are entitled to share equally on a share
for share basis in any assets available for distribution to stockholders on
liquidation, dissolution or winding up of Pegasus. No shares of common stock
are subject to redemption or a sinking fund. In the event of any increase or
decrease in the number of outstanding shares of either Class A common stock or
Class B common stock from a stock split, combination or consolidation of
135
<PAGE>
shares or other capital reclassification, Pegasus is required to take parallel
action with respect to the other class so that the number of shares of each
class outstanding immediately following the stock split, combination,
consolidation or capital reclassification bears the same relationship to each
other as the number of shares of each class outstanding before such event.
With regard to Golden Sky, the holders of Series A convertible
participating preferred stock, Series B convertible participating preferred
stock and Series C senior convertible preferred stock are entitled to vote on
all matters generally submitted to the holders of the common stock, voting
together with the common stockholders as a single class, based upon the number
of shares of common stock into which their shares of preferred stock are
convertible. See -- Conversion Rights and Transfer Restrictions. The Series A
and B convertible participating preferred stock are entitled to vote as a
separate class with respect to certain matters relating to a change in control
of Golden Sky. Each series of Golden Sky's preferred stock, other than the
Series D redeemable preferred stock, is entitled to vote as a separate class
with respect to certain corporate actions, which vary depending upon the
series. The holders of Series A redeemable preferred stock or Series B
redeemable preferred stock are entitled to elect one director, respectively, in
the event that all shares of Series A convertible participating preferred stock
or all shares of Series B convertible participating preferred stock have been
converted into common stock and the respective series of redeemable preferred
stock. Except as described above or as required by law, the holders of Series D
redeemable preferred stock are not entitled to vote.
In the event of any voluntary or involuntary dissolution, winding up or
liquidation of Golden Sky, including a merger or consolidation which results in
a change of control of Golden Sky, except if an election is made not to treat
the change of control as a liquidation event as described below under -- Change
of Control, after payment or provision for payment of all of Golden Sky's debts
and other liabilities, the common stockholders' right to receive distributions
out of the remaining assets will be subject to the rights of the preferred
stockholders to receive such distributions. In order of preference:
o the holders of Series D redeemable preferred stock are entitled to
receive, out of the remaining assets, $200 per share, subject to
adjustment;
o the holders of Series C senior convertible preferred stock are entitled
to receive, out of the remaining assets, $200 per share, subject to
adjustment; and
o the holders of Series A convertible participating preferred stock or
Series A redeemable preferred stock, on the one hand, and Series B
convertible participating preferred stock or Series B redeemable preferred
stock, on the other hand, are entitled to receive, out of the remaining
assets, $100 per share and $200 per share, respectively, subject to
adjustment.
Each of the foregoing holders is also entitled to accrued but unpaid dividends
up to the date of distribution, whether or not declared, plus any accrued
interest as provided in the certificate of designation.
Following distribution of the assets of Golden Sky to the preferred
stockholders according to the above preferences, any remaining assets of Golden
Sky shall be distributed ratably among the holders of common stock and Series A
and B convertible participating preferred stock. If, upon any liquidation of
Golden Sky, the assets distributable among the holders of the common and
preferred stock are insufficient to permit the payment in full to the holders
of one or more series of preferred stock, then the entire assets of Golden Sky
thus distributable will be distributed among the holders of the preferred stock
in order of their preferences, and the holders of common stock will not be
entitled to receive any distributions.
Dividend Rights
Stock dividends on Pegasus' Class A common stock may be paid only in
shares of Class A common stock or non-voting common stock, stock dividends on
Class B common stock may be paid only in shares of Class B common stock or
non-voting common stock and stock dividends on non-voting common stock may be
paid only in shares of non-voting common stock. Each share of common stock is
entitled to receive
136
<PAGE>
dividends if, as and when declared by Pegasus' board of directors out of funds
legally available. The Class A common stock, Class B common stock and
non-voting common stock share equally, on a share-for-share basis, in any cash
dividends declared by Pegasus' board of directors.
The holders of shares of Pegasus' Series A preferred stock, Series B,
Series D and Series E junior convertible participating preferred stock and
Series C convertible participating preferred stock are entitled to receive,
when, as and if dividends are declared by Pegasus' board of directors out of
funds legally available. See Description of Capital Stock -- Description of
Series A Preferred Stock, Description of Series B, Series D and Series E Junior
Convertible Participating Preferred Stock and Description of Series C
Convertible Preferred Stock.
The holders of Golden Sky's common stock are entitled to receive dividends
if, as and when declared by Golden Sky's board of directors out of fund legally
available therefor, subject to the rights of the holders of preferred stock to
receive dividends. In order of preference, the holders of preferred stock are
entitled to receive the following dividends:
o the holders of Series D redeemable preferred stock are entitled to
receive cumulative, compounding dividends at the rate of 10% per annum of
the Series D redeemable preferred stock's liquidation preference, which is
$200 per share, subject to adjustment, with such dividend payable
exclusively in shares of Series D redeemable preferred stock;
o the holders of Series C senior convertible preferred stock are entitled
to receive cumulative, compounding dividends at the rate of 10% per annum
of the Series C senior convertible preferred stock's liquidation
preference, which is $200 per share, subject to adjustment; and
o the holders of Series A convertible participating preferred stock or
Series A redeemable preferred stock, on the one hand, and Series B
convertible participating preferred stock or Series B redeemable preferred
stock, on the other hand, are entitled to receive cumulative, compounding
dividends at the rate of 14.5% per annum of each series' liquidation
preference, which is $100 per share for the Series A and $200 per share
for the Series B, each subject to adjustment.
Following the payment of dividends according to the above preferences, the
holders of the Series A and B convertible participating preferred stock will
share any dividends if, as and when declared by Golden Sky's board of directors
pro rata with the holders of the common stock.
Size and Make-up of the Board of Directors
When the merger closes, Pegasus' board of directors will be increased to
eleven members with directors to be designated by certain entities or
individuals. See The Merger -- Voting Agreement.
Golden Sky's board of directors consists of seven members. Under the
stockholders' agreement, dated as of November 24, 1997, among certain holders
of Golden Sky's common stock and the holders of its Series A convertible
participating preferred stock and Series B convertible participating preferred
stock, the parties to the agreement are obligated to vote their shares for two
directors designated by certain holders of the common stock covered by the
agreement and five directors designated by certain holders of the Series A
convertible participating preferred stock and Series B convertible
participating preferred stock. Although the holders of Series C senior
convertible preferred stock have the right to vote for the election of
directors, they are not parties to the stockholders' agreement and are not
entitled to designate any directors. The holders of Series D redeemable
preferred stock are not entitled to vote for the election of directors.
Preemptive Rights
Pegasus' stockholders have no preemptive or other rights to subscribe for
additional shares. With regard to Golden Sky, the holders of Series D
redeemable preferred stock are entitled to purchase up to their proportionate
share of all issuances of Golden Sky's capital stock or options or warrants
therefor, other than certain excluded issuances.
Change of Control
If a "change of control" occurs, as defined in Pegasus's Series A
preferred stock certificate of designation, each holder of Pegasus' Series A
preferred stock shall have the right to require Pegasus to repurchase all or
any part of such holder's Series A preferred stock at an offer price in cash
equal to 101% of the aggregate liquidation preference thereof plus accrued and
unpaid dividends, if any, thereon to the date of purchase.
137
<PAGE>
If a change of control occurs, holders of Pegasus' Series C convertible
preferred stock will have a one-time option to convert the holder's Series C
convertible preferred stock into Class A common stock. However, they can only
do this if the market price of the Class A common stock is less than the
conversion price of the Series C convertible preferred stock. See Description
of Stock -- Description of Series C Convertible Preferred Stock.
With regard to Golden Sky, a merger, consolidation or sale of all or
substantially all of its assets would be a liquidation event, entitling the
holders of each series of preferred stock to their respective liquidation
preferences described above. However, the holders of the Series A and B
convertible participating preferred stock may elect to receive shares of the
capital stock of the surviving entity rather than treat such event as a
liquidation event. In such case, the Series C senior convertible preferred
stock will also be required to accept shares of the capital stock of the
surviving entity. In connection with the merger, the holders of Series A and B
convertible participating preferred stock have agreed to the conversion ratios
described under The Merger -- The Merger Agreement -- Conversion of Golden Sky
Capital Stock.
Conversion Rights and Transfer Restrictions
Pegasus' Class A common stock and non-voting common stock have no
conversion rights. Each share of Pegasus' Class B common stock is convertible
at the option of the holder at any time and from time to time into one share of
Class A common stock. Pegasus' amended and restated certificate of
incorporation provides that any holder of shares of Class B common stock
desiring to transfer such shares to a person other than a transferee permitted
under Pegasus' amended and restated certificate of incorporation must present
those shares to Pegasus for conversion into an equal number of shares of Class
A common stock upon such transfer. Thereafter, those shares of Class A common
stock may be freely transferred to persons other than transferees permitted
under Pegasus' amended and restated certificate of incorporation, subject to
applicable securities laws.
In the event that shares of non-voting common stock are issued in the
future, Pegasus would decide at the time whether to register those shares under
the Securities Act of 1933. If they are not registered, the shares of
non-voting common stock would be subject to restrictions on transfer.
See Description of Capital Stock -- Description of Series B, Series D and
Series E Junior Convertible Participating Preferred Stock and -- Description of
Series C Convertible Preferred Stock for a description of conversion rights of
these series of Pegasus' preferred stock.
Golden Sky's common stock has no conversion rights. Each share of Series A
convertible participating preferred stock is convertible into one share of
Series A redeemable preferred stock and one share of common stock, subject to
adjustment for certain events. Each share of Series B convertible participating
preferred stock is convertible into one share of Series B redeemable preferred
stock and one share of common stock, subject to adjustment for certain events.
Each share of Series C senior convertible preferred stock is convertible into
one share of common stock, subject to adjustment for certain events. The Series
A redeemable preferred stock, the Series B redeemable preferred stock and the
Series D redeemable preferred stock are not convertible.
The Golden Sky stockholders' agreement discussed above also places
restrictions on the transferability of the shares covered by the agreement. See
- -- Size and Make-up of the Board of Directors. Under the agreement, the covered
shares cannot be transferred without the written consent of 58% in interest of
the Series A convertible participating preferred shares and the Series B
convertible participating preferred shares, subject to certain exceptions. In
addition, the agreement provides that Golden Sky and the holders of Series A
convertible participating preferred stock and Series B convertible
participating preferred stock are entitled to a right of first offer to
purchase shares of Golden Sky's capital stock to be sold, other than in certain
specified transactions, by any of the stockholders that are a party to the
agreement, and a co-sale right to include their shares in the proposed sale.
Also, if 58% in interest of the Series A convertible participating preferred
stockholders and the Series B convertible participating preferred stockholders
decide to dispose of all or substantially all of their shares or the assets of
Golden Sky, or cause Golden Sky to merge or consolidate into a third party,
they have the right to require the other stockholders that are parties to the
agreement to participate in the transaction.
138
<PAGE>
Class Voting
Any amendment to Pegasus' amended and restated certificate of
incorporation that has any of the following effects will require the approval
of the holders of a majority of the outstanding shares of each of the Class A
common stock and Class B common stock, voting as separate classes:
o any decrease in the voting rights per share of Class A common stock or
any increase in the voting rights of Class B common stock;
o any increase in the number of shares of Class A common stock into which
shares of Class B common stock are convertible;
o any relaxation on the restrictions on transfer of the Class B common
stock; or
o any change in the powers, preferences or special rights of the Class A
common stock or Class B common stock adversely affecting the holders of
the Class A common stock.
The approval of the holders of a majority of the outstanding shares of
each of the Class A common stock and Class B common stock, voting as separate
classes, is also required to authorize or issue additional shares of Class B
common stock, except for parallel action with respect to Class A common stock
in connection with stock dividends, stock splits, recapitalizations and similar
changes in Pegasus' capitalization.
Other than the various voting rights and obligations discussed above or as
required by law, Golden Sky does not have any provisions for class voting. See
- -- Voting, Liquidation and Other Rights and -- Size and Make-up of the Board of
Directors.
LEGAL MATTERS
The validity of the shares of Class A common stock to be issued in
connection with the merger will be passed upon by Drinker Biddle & Reath LLP,
counsel for Pegasus. Michael B. Jordan, a partner of Drinker Biddle & Reath
LLP, is an Assistant Secretary of Pegasus.
Drinker Biddle & Reath LLP has delivered an opinion to the effect that the
description of the federal income tax consequences of the merger under the
heading The Merger -- Certain Federal Income Tax Consequences correctly sets
forth the material federal income tax consequences of the merger to Pegasus,
Golden Sky and their respective stockholders. Pegasus' obligation to complete
the merger is conditioned upon Pegasus' stockholders' receipt of an opinion
from McDermott, Will & Emery in form and substance reasonably satisfactory to
Pegasus. Golden Sky's obligation to complete the merger is conditioned upon
Golden Sky's receipt of an opinion from Drinker Biddle & Reath LLP in form and
substance reasonably satisfactory to Golden Sky.
EXPERTS
Pegasus' consolidated balance sheets as of December 31, 1998 and 1999 and
the related consolidated statements of operations, statements of changes in
total equity and statements of cash flows for each of the three years in the
period ended December 31, 1999 included in this proxy statement/prospectus,
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
Golden Sky's consolidated balance sheets as of December 31, 1998 and 1999
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1999 included in this proxy statement/prospectus, have been included herein in
reliance on the report of KPMG LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
139
<PAGE>
FINANCIAL STATEMENT INDEX
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Pegasus Communications Corporation
Report of PricewaterhouseCoopers LLP ..................................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 ............................. F-3
Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and
1999.................................................................................... F-4
Consolidated Statements of Changes in Total Equity (Deficit) for the years ended
December 31, 1997, 1998 and 1999 ........................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and
1999.................................................................................... F-6
Notes to Consolidated Financial Statements ............................................... F-7
Golden Sky Holdings, Inc. (GSH)
(a proposed acquisition)
Report of KPMG LLP ....................................................................... F-25
Consolidated Balance Sheets as of December 31, 1998 and 1999 ............................. F-26
Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and
1999.................................................................................... F-27
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 1997, 1998 and 1999 ........................................................ F-28
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and
1999.................................................................................... F-29
Notes to Consolidated Financial Statements ............................................... F-30
Pegasus Communications Corporation
Pro Forma Consolidated Financial Information (unaudited)
Basis of Presentation ................................................................. F-59
Pro Forma Consolidated Statement of Operations Data for the Year Ended December 31,
1999.................................................................................... F-60
Notes to Pro Forma Consolidated Statement of Operations Data .......................... F-61
Pro Forma Consolidated Balance Sheet as of December 31, 1999 .......................... F-62
Notes to Pro Forma Consolidated Balance Sheet ......................................... F-63
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Pegasus Communications Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and changes in total equity (deficit) and
of cash flows present fairly, in all material respects, the financial position
of Pegasus Communications Corporation and its subsidiaries at December 31, 1998
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
accounting standards generally accepted in the United States which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
February 11, 2000
F-2
<PAGE>
Pegasus Communications Corporation
Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................... $ 54,505 $ 40,453
Restricted cash ......................................................... 21,479 2,379
Accounts receivable, less allowance of $567 and $1,410, respectively .... 20,882 31,984
Inventory ............................................................... 5,427 10,020
Program rights .......................................................... 3,157 4,373
Deferred taxes .......................................................... 2,603 536
Prepaid expenses and other .............................................. 1,207 4,597
---------- ----------
Total current assets .................................................. 109,260 94,342
Property and equipment, net .............................................. 34,067 44,415
Intangible assets, net ................................................... 729,406 760,637
Program rights ........................................................... 3,428 5,732
Deferred taxes ........................................................... 9,277 30,371
Investment in affiliate .................................................. -- 4,598
Deposits and other ....................................................... 872 5,237
---------- ----------
Total assets .......................................................... $ 886,310 $ 945,332
========== ==========
LIABILITIES AND TOTAL EQUITY
Current liabilities:
Current portion of long-term debt ....................................... $ 14,399 $ 15,488
Accounts payable ........................................................ 4,795 8,999
Accrued interest ........................................................ 17,465 11,592
Accrued satellite programming, fees and commissions ..................... 22,681 37,885
Accrued expenses ........................................................ 9,599 14,139
Amounts due seller ...................................................... -- 6,729
Current portion of program rights payable ............................... 2,432 4,446
---------- ----------
Total current liabilities ............................................. 71,371 99,278
Long-term debt ........................................................... 544,629 668,926
Program rights payable ................................................... 2,472 4,211
Deferred taxes ........................................................... 80,672 90,310
---------- ----------
Total liabilities ..................................................... 699,144 862,725
---------- ----------
Commitments and contingent liabilities ................................... -- --
Minority interest ........................................................ 3,000 3,000
Preferred Stock; $0.01 par value; 5.0 million shares authorized .......... -- --
Series A Preferred Stock; $0.01 par value; 143,684 shares authorized;
119,369 and 135,073 issued and outstanding .............................. 126,028 142,734
Common stockholders' equity (deficit):
Class A Common Stock; $0.01 par value; 50.0 million shares authorized;
11,315,809 and 15,216,510 issued and outstanding ...................... 113 152
Class B Common Stock; $0.01 par value; 15.0 million shares authorized;
4,581,900 issued and outstanding ...................................... 46 46
Non-Voting Common Stock; $0.01 par value; 20.0 million shares
authorized ............................................................ -- --
Additional paid-in capital .............................................. 173,871 237,566
Deficit ................................................................. (115,892) (300,704)
Class A Common Stock in treasury, at cost; 4,253 shares ................. -- (187)
---------- ----------
Total common stockholders' equity (deficit) ........................... 58,138 (63,127)
---------- ----------
Total liabilities and stockholders' equity (deficit) .................. $ 886,310 $ 945,332
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1998 1999
------------ ------------- -------------
<S> <C> <C> <C>
Net revenues:
DBS .................................................................. $ 38,254 $ 147,142 $ 286,353
Broadcast ............................................................ 31,876 34,311 36,415
-------- --------- ---------
Total net revenues ................................................. 70,130 181,453 322,768
Operating expenses:
DBS
Programming, technical, general and administrative ................. 26,042 102,419 201,158
Marketing and selling .............................................. 5,973 45,706 117,774
Incentive compensation ............................................. 795 1,159 1,592
Depreciation and amortization ...................................... 17,042 59,077 82,744
Broadcast
Programming, technical, general and administrative ................. 15,672 18,056 22,812
Marketing and selling .............................................. 5,704 5,993 6,304
Incentive compensation ............................................. 298 177 57
Depreciation and amortization ...................................... 3,754 4,557 5,144
Corporate expenses ................................................... 2,256 3,614 5,975
Corporate depreciation and amortization .............................. 1,353 2,105 3,119
Other expense, net ................................................... 630 1,409 1,995
-------- --------- ---------
Loss from operations .............................................. (9,389) (62,819) (125,906)
Interest expense ...................................................... (14,275) (44,559) (64,904)
Interest income ....................................................... 1,508 1,586 1,356
-------- --------- ---------
Loss from continuing operations before income taxes, equity loss
and extraordinary items ............................................ (22,156) (105,792) (189,454)
Provision (benefit) for income taxes .................................. 168 (901) (8,892)
Equity in net loss of unconsolidated affiliate ........................ -- -- (201)
-------- --------- ---------
Loss from continuing operations before extraordinary items ........... (22,324) (104,891) (180,763)
Discontinued operations:
Income from discontinued operations of cable segment, net of
income taxes ....................................................... 257 1,047 2,128
Gain on sale of discontinued operations, net of income taxes ......... 4,451 24,727 --
-------- --------- ---------
Loss before extraordinary items ...................................... (17,616) (79,117) (178,635)
Extraordinary loss from extinquishment of debt, net ................... (1,656) -- (6,178)
-------- --------- ---------
Net loss ............................................................. (19,272) (79,117) (184,813)
Preferred stock dividends ............................................ 12,215 14,764 16,706
-------- --------- ---------
Net loss applicable to common shares ................................. ($ 31,487) ($ 93,881) ($ 201,519)
======== ========= =========
Basic and diluted earnings per common share: ..........................
Loss from continuing operations ...................................... $ (3.50) $ (8.46) $ (10.46)
Income from discontinued operations .................................. 0.03 0.07 0.11
Gain on sale of discontinued operations .............................. 0.45 1.75 --
-------- --------- ---------
Loss before extraordinary items ...................................... (3.02) (6.64) (10.35)
Extraordinary loss ................................................... (0.17) -- ( 0.33)
-------- --------- ---------
Net loss ............................................................. $ (3.19) $ (6.64) $ (10.68)
======== ========= =========
Weighted average shares outstanding (000's) .......................... 9,858 14,130 18,875
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Changes in Total Equity (Deficit)
(In thousands)
<TABLE>
<CAPTION>
Common Stock
Series A -------------------- Additional
Preferred Number Par Paid-In
Stock of Shares Value Capital
----------- ----------- ------- ------------
<S> <C> <C> <C> <C>
Balances at January 1, 1997 .................... -- 9,245 $ 92 $ 57,736
Net loss .......................................
Issuance of Class A Common Stock due to:
Acquisitions .................................. 958 10 15,188
Incentive compensation and awards ............. 119 1 1,307
Issuance of Series A Preferred Stock due to:
Unit Offering ................................. $100,000
Paid and accrued dividends .................... 12,215 (12,215)
Issuance of warrants due to:
Acquisitions .................................. 1,068
Unit Offering ................................. (951) 951
-------- ------ ---- ---------
Balances at December 31, 1997 .................. 111,264 10,322 103 64,035
Net loss .......................................
Issuance of Class A Common Stock due to:
Acquisitions .................................. 5,509 55 119,641
Incentive compensation and awards ............. 67 1 1,414
Issuance of Series A Preferred Stock due to:
Paid and accrued dividends .................... 14,764 (14,764)
Issuance of warrants and options due to:
Acquisitions .................................. 3,545
-------- ------ ---- ---------
Balances at December 31, 1998 .................. 126,028 15,898 159 173,871
Net loss .......................................
Issuance of Class A Common Stock due to:
Secondary Offering ............................ 3,616 36 74,857
Acquisitions .................................. 12 -- 550
Exercise of warrants and options .............. 220 2 2,781
Incentive compensation and awards ............. 52 1 1,399
Issuance of Series A Preferred Stock due to:
Paid and accrued dividends .................... 16,706 (16,706)
Issuance of warrants due to:
Acquisitions .................................. 814
Repurchase of Class A Common Stock .............
-------- ------ ---- ---------
Balances at December 31, 1999 .................. $142,734 19,798 $198 $ 237,566
======== ====== ==== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Treasury Stock Total
Retained ----------------------- Common
Earnings Number Stockholders'
(Deficit) of Shares Cost Equity (Deficit)
------------- ----------- ---------- -----------------
<S> <C> <C> <C> <C>
Balances at January 1, 1997 .................... ($ 17,502) -- -- $ 40,326
Net loss ....................................... (19,272) (19,272)
Issuance of Class A Common Stock due to:
Acquisitions .................................. 15,198
Incentive compensation and awards ............. 1,308
Issuance of Series A Preferred Stock due to:
Unit Offering .................................
Paid and accrued dividends .................... (12,215)
Issuance of warrants due to:
Acquisitions .................................. 1,068
Unit Offering ................................. 951
--------- -- ----- ---------
Balances at December 31, 1997 .................. (36,774) -- -- 27,364
Net loss ....................................... (79,117) (79,117)
Issuance of Class A Common Stock due to:
Acquisitions .................................. 119,696
Incentive compensation and awards ............. 1,415
Issuance of Series A Preferred Stock due to:
Paid and accrued dividends .................... (14,764)
Issuance of warrants and options due to:
Acquisitions .................................. 3,545
--------- -- ----- ---------
Balances at December 31, 1998 .................. (115,891) -- -- 58,139
Net loss ....................................... (184,813) (184,813)
Issuance of Class A Common Stock due to:
Secondary Offering ............................ 74,893
Acquisitions .................................. 550
Exercise of warrants and options .............. 2,783
Incentive compensation and awards ............. 1,400
Issuance of Series A Preferred Stock due to:
Paid and accrued dividends .................... (16,706)
Issuance of warrants due to:
Acquisitions .................................. 814
Repurchase of Class A Common Stock ............. 4 ($ 187) (187)
--------- -- ----- ---------
Balances at December 31, 1999 .................. ($ 300,704) 4 ($ 187) ($ 63,127)
========= == ===== =========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1998 1999
------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................................... ($ 19,272) ($ 79,117) ($ 184,813)
Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Extraordinary loss on extinguishment of debt, net .......... 1,656 -- 6,178
Depreciation and amortization .............................. 27,792 70,731 97,989
Program rights amortization ................................ 1,716 2,366 3,686
Accretion on discount of bonds and seller notes ............ 394 1,320 1,446
Stock incentive compensation ............................... 1,274 1,452 2,002
Gain on disposal of assets ................................. -- -- (78)
Gain on sale of cable systems .............................. (4,451) (24,727) --
Equity in net loss of unconsolidated affiliate ............. -- -- 201
Bad debt expense ........................................... 1,142 2,851 8,369
Deferred income taxes ...................................... 200 (896) (8,892)
Change in assets and liabilities:
Accounts receivable ....................................... (5,608) (6,464) (18,982)
Inventory ................................................. (116) (3,105) (4,422)
Prepaid expenses and other ................................ 305 (244) (3,315)
Accounts payable and accrued expenses ..................... 5,834 9,747 21,985
Accrued interest .......................................... 2,585 4,372 (5,873)
Capitalized subscriber acquisition costs .................. (4,515) -- --
Deposits and other ........................................ (458) (248) (4,360)
--------- --------- ---------
Net cash provided (used) by operating activities ........... 8,478 (21,962) (88,879)
--------- --------- ---------
Cash flows from investing activities:
Acquisitions ............................................... (133,886) (109,340) (106,907)
Cash acquired from acquisitions ............................ 379 3,284 5
Capital expenditures ....................................... (9,929) (12,400) (14,784)
Purchase of intangible assets .............................. (3,034) (10,489) (4,552)
Payments for programming rights ............................ (2,584) (2,561) (3,452)
Proceeds from sale of assets ............................... -- -- 509
Proceeds from sale of cable system ......................... 6,945 30,133 --
Investment in affiliate .................................... -- -- (4,800)
--------- --------- ---------
Net cash used for investing activities ...................... (142,109) (101,373) (133,981)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt ............................... 115,000 100,000 --
Repayments of long-term debt ............................... (320) (14,572) (14,291)
Borrowings on bank credit facilities ....................... 94,726 108,800 180,900
Repayments of bank credit facilities ....................... (124,326) (64,400) (50,600)
Restricted cash ............................................ (1,220) 7,541 19,100
Debt issuance costs ........................................ (10,237) (3,179) (3,608)
Capital lease repayments ................................... (337) (399) (183)
Proceeds from issuance of Class A Common Stock ............. -- -- 82,334
Proceeds from issuance of Series A Preferred Stock ......... 100,000 -- --
Underwriting and stock offering costs ...................... (4,188) -- (4,657)
Repurchase of Class A Common Stock ......................... -- -- (187)
--------- --------- ---------
Net cash provided by financing activities ................... 169,098 133,791 208,808
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ......... 35,467 10,456 (14,052)
Cash and cash equivalents, beginning of year ................. 8,582 44,049 54,505
--------- --------- ---------
Cash and cash equivalents, end of year ....................... $ 44,049 $ 54,505 $ 40,453
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Pegasus Communications Corporation ("Pegasus" or together with its
subsidiaries, the "Company") operates in growing segments of the media industry
and is a direct subsidiary of Pegasus Communications Holdings, Inc. ("PCH" or
the "Parent"). Pegasus' significant direct operating subsidiaries are Pegasus
Media & Communications, Inc. ("PM&C") and Digital Television Services, Inc.
("DTS").
PM&C's subsidiaries provide direct broadcast satellite television ("DBS")
services to customers in certain rural areas of the United States; own and/or
program broadcast television ("Broadcast" or "TV") stations affiliated with the
Fox Broadcasting Company ("Fox"), United Paramount Network ("UPN") and The WB
Television Network ("WB"); and own and operate a cable television ("Cable")
system that provides service to individual and commercial subscribers in Puerto
Rico. DTS and its subsidiaries provide DBS services to customers in certain
rural areas of the United States.
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The accompanying consolidated financial statements include the accounts of
Pegasus and all of its subsidiaries. All intercompany transactions and balances
have been eliminated. Certain amounts for 1997 and 1998 have been reclassified
for comparative purposes.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and
liabilities and the disclosure of contingencies. Actual results could differ
from those estimates. Significant estimates relate to barter transactions and
the useful lives and recoverability of intangible assets.
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid investments purchased with
an initial maturity of three months or less. The Company has cash balances in
excess of the federally insured limits at various banks.
Restricted Cash:
The Company had restricted cash held in escrow of approximately $21.5
million and $2.4 million at December 31, 1998 and 1999, respectively. At
December 31, 1998, $18.9 million was to fund interest payments on the DTS
Notes, $1.6 million was to collateralize certain outstanding loans and $1.0
million was held in escrow for the purchase of a cable system serving
Aguadilla, Puerto Rico. At December 31, 1999, $2.4 million is to collateralize
certain outstanding loans.
Inventories:
Inventories consist of equipment held for resale to customers and
installation supplies. Inventories are stated at the lower of cost or market on
a first-in, first-out basis.
Long-Lived Assets:
The Company's assets are reviewed for impairment whenever events or
circumstances provide evidence which suggest the carrying amounts may not be
recoverable. The Company assesses the recoverability of its assets by
determining whether the depreciation or amortization of the respective asset
balance can be recovered through projected undiscounted future cash flows. To
date, no such impairments have occurred.
Property and Equipment:
Property and equipment are stated at cost. The cost and related
accumulated depreciation of assets fully depreciated, sold, retired or
otherwise disposed of are removed from the respective accounts and any
resulting
F-7
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies: -- (Continued)
gains or losses are included in the statement of operations. For cable
television systems, initial subscriber installation costs including material,
labor and overhead costs of the hookup are capitalized as part of the
distribution facilities. The costs of disconnection and reconnection are
charged to expense. Satellite equipment that is leased to customers is stated
at cost.
Depreciation is computed for financial reporting purposes using the
straight-line method based upon the following lives:
Reception and distribution facilities ......... 7 to 11 years
Transmitter equipment ......................... 5 to 10 years
Equipment, furniture and fixtures ............. 5 to 10 years
Building and improvements ..................... 12 to 39 years
Vehicles and other equipment .................. 3 to 5 years
Intangible Assets:
Intangible assets are stated at cost. The cost and related accumulated
amortization of assets fully amortized, sold, retired or otherwise disposed of
are removed from the respective accounts and any resulting gains or losses are
included in the statement of operations. Costs of successful franchise
applications are capitalized and amortized over the lives of the related
franchise agreements, while unsuccessful franchise applications and abandoned
franchises are charged to expense. Financing costs incurred in obtaining
long-term financing are amortized over the term of the applicable loan.
Amortization of intangible assets is computed for financial reporting
purposes using the straight-line method based upon the following lives:
Network affiliation agreements ......... 40 years
Goodwill ............................... 40 years
DBS rights ............................. 10 years
Broadcast licenses ..................... 7 years
Other intangibles ...................... 2 to 14 years
Revenue:
The Company operates in growing segments of the media industry: DBS and
Broadcast. The Company recognizes revenue in its DBS operations when video and
audio services are provided. The Company recognizes revenue in its Broadcast
operations when advertising spots are broadcast.
The Company obtains a portion of its TV programming through its network
affiliations with Fox, UPN and WB and also through independent producers. The
Company does not make any direct payments for this programming. Instead, the
Company retains a portion of the available advertisement spots to sell on its
own account. Barter programming revenue and the related expense are recognized
when the advertisements sold by the networks or independent producers are
broadcast. Gross barter amounts of $7.5 million, $8.1 million and $7.6 million
for 1997, 1998 and 1999, respectively, are included in Broadcast revenue and
programming expense in the accompanying consolidated statements of operations.
Advertising Costs:
Advertising costs are charged to operations in the period incurred and
totaled approximately $3.6 million, $14.0 million and $23.3 million for the
years ended December 31, 1997, 1998 and 1999, respectively.
F-8
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies: -- (Continued)
Program Rights:
The Company enters into agreements to show motion pictures and syndicated
programs on television. The Company records the right and associated
liabilities for those films and programs when they are currently available for
showing. These rights are recorded at the lower of unamortized cost or
estimated net realizable value and are amortized on the straight-line method
over the license period, which approximates amortization based on the estimated
number of showings during the contract period. Amortization of $1.7 million,
$2.4 million and $3.7 million is included in Broadcast programming expense for
the years ended December 31, 1997, 1998 and 1999, respectively. The obligations
arising from the acquisition of film rights are recorded at the gross amount.
Payments for the contracts are made pursuant to the contractual terms over
periods which are generally shorter than the license periods.
Income Taxes:
The Company accounts for income taxes utilizing the asset and liability
approach, whereby deferred tax assets and liabilities are recorded for the tax
effect of differences between the financial statement carrying values and tax
bases of assets and liabilities. A valuation allowance is recorded for deferred
taxes where it appears more likely than not that the Company will not be able
to recover the deferred tax asset. MCT Cablevision, LP, a subsidiary of the
Company, is treated as a partnership for federal and state income tax purposes
but taxed as a corporation for Puerto Rico income tax purposes.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables, cash
and cash equivalents.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base and their dispersion across different businesses and geographic regions.
As of December 31, 1998 and 1999, the Company had no other significant
concentrations of credit risk.
Reliance on DIRECTV:
A substantial portion of the Company's business is derived from providing
DBS services as an independent DIRECTV(R) ("DIRECTV") provider. Because the
Company is a distributor of DIRECTV services, the Company may be adversely
affected by any material adverse changes in the assets, financial condition,
programming, technological capabilities or services of DIRECTV or its parent,
Hughes Electronics Corporation ("Hughes").
New Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). As a result of the subsequent
issuance of SFAS No. 137 in July 1999, SFAS No. 133 is now effective for fiscal
years beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Company does not expect the adoption of SFAS No. 133 to have a material effect
on our business, financial position or results of operations.
F-9
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Property and Equipment:
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
-------------- -------------
<S> <C> <C>
Reception and distribution facilities ......... $ 20,713 $ 32,179
Transmitter equipment ......................... 17,728 16,940
Equipment, furniture and fixtures ............. 8,530 12,491
Building and improvements ..................... 3,410 7,951
Land .......................................... 1,229 1,618
Vehicles ...................................... 1,112 2,122
Other equipment ............................... 5,894 3,500
--------- ---------
58,616 76,801
Accumulated depreciation ...................... (24,549) (32,386)
--------- ---------
Net property and equipment .................... $ 34,067 $ 44,415
========= =========
</TABLE>
Depreciation expense amounted to $5.7 million, $6.2 million and $7.9
million for the years ended December 31, 1997, 1998 and 1999, respectively.
4. Intangibles:
Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
-------------- -------------
<S> <C> <C>
DBS rights .............................................. $ 712,232 $ 793,040
Deferred financing costs ................................ 33,763 32,927
Franchise costs ......................................... 31,158 71,657
Goodwill ................................................ 28,033 28,033
Broadcast licenses and affiliation agreements.. ......... 19,062 20,436
Consultancy and non-compete agreements .................. 7,023 7,964
Other deferred costs .................................... 13,121 16,873
---------- ----------
844,392 970,930
Accumulated amortization ................................ (114,986) (210,293)
---------- ----------
Net intangible assets ................................... $ 729,406 $ 760,637
========== ==========
</TABLE>
Amortization expense amounted to $22.1 million, $64.5 million and $90.1
million for the years ended December 31, 1997, 1998 and 1999, respectively.
5. Equity Investment in Affiliate:
Pegasus Development Corporation ("PDC"), a subsidiary of Pegasus, has a
93% investment in Pegasus PCS Partners, LP ("PCS") which is accounted for by
the equity method. PCS, a jointly owned limited partnership, acquires, owns,
controls and manages wireless licenses. Pegasus PCS, Inc. is the sole general
partner of PCS and is controlled by Marshall W. Pagon, the Company's President
and Chief Executive Officer. PDC's share of undistributed losses of PCS
included in continuing operations was a loss of $201,000 for 1999. PDC's total
investment in PCS at December 31, 1999 was $4.6 million.
6. Common Stock:
In March 1999, Pegasus completed a secondary public offering in which it
sold approximately 3.6 million shares of its Class A Common Stock to the public
at a price of $22 per share, resulting in net proceeds to the Company of $74.9
million.
F-10
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Common Stock: -- (Continued)
On June 21, 1999, the Company amended Pegasus' Certificate of
Incorporation, increasing the number of authorized shares of Class A Common
Stock from 30.0 million to 50.0 million and authorizing 20.0 million shares of
Non-Voting Common Stock, par value $0.01 per share.
During 1999, the Company repurchased 4,253 shares of its Class A Common
Stock for $186,822. The shares, which are held in treasury, were surrendered by
employees to satisfy withholding obligations under the Company's restricted
stock plan. The Company applies the cost method in accounting for treasury
stock.
As of December 31, 1998 and 1999, the Company had three classes of Common
Stock: Class A Common Stock, Class B Common Stock and Non-Voting Common Stock.
Holders of Class A Common Stock and Class B Common Stock are entitled to one
vote per share and ten votes per share, respectively.
The Company's ability to pay dividends on its Common Stock is subject to
certain restrictions.
7. Preferred Stock:
As of December 31, 1998 and 1999, the Company had 5.0 million shares of
Preferred Stock authorized of which 126,978 and 143,684 shares have been
designated as 12.75% Series A Cumulative Exchangeable Preferred Stock (the
"Series A Preferred Stock").
The Company had approximately 119,369 and 135,073 shares of Series A
Preferred Stock issued and outstanding at December 31, 1998 and 1999,
respectively. In December, 1999 the Board of Directors declared a dividend on
the Series A Preferred Stock in the aggregate of approximately 8,611 shares of
Series A Preferred Stock, payable on January 1, 2000. Each whole share of
Series A Preferred Stock has a liquidation preference of $1,000 per share (the
"Liquidation Preference"). Cumulative dividends, at a rate of 12.75% are
payable semi-annually on January 1 and July 1. Dividends may be paid, occurring
on or prior to January 1, 2002, at the option of the Company, either in cash or
by the issuance of additional shares of Series A Preferred Stock. Subject to
certain conditions, the Series A Preferred Stock is exchangeable in whole, but
not in part, at the option of the Company, for Pegasus' 12.75% Senior
Subordinated Exchange Notes due 2007 (the "Exchange Notes"). The Exchange Notes
would contain substantially the same redemption provisions, restrictions and
other terms as the Series A Preferred Stock. Pegasus is required to redeem all
of the Series A Preferred Stock outstanding on January 1, 2007 at a redemption
price equal to the Liquidation Preference thereof, plus accrued dividends.
The carrying amount of the Series A Preferred Stock is periodically
increased by amounts representing dividends not currently declared or paid but
which will be payable under the mandatory redemption features. The increase in
carrying amount is effected by charges against retained earnings, or in the
absence of retained earnings, by charges against paid-in capital.
Under the terms of the Series A Preferred Stock, Pegasus' ability to pay
dividends on its Common Stock is subject to certain restrictions.
F-11
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Long-Term Debt:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
-------------- -------------
<S> <C> <C>
Series B Senior Notes payable by Pegasus, due 2005, interest at 9.625%,
payable semi-annually in arrears on April 15 and October 15 ................ $115,000 $115,000
Series B Senior Notes payable by Pegasus, due 2006, interest at 9.75%,
payable semi-annually in arrears on June 1 and December 1 .................. 100,000 100,000
Series A Senior Notes payable by Pegasus, due 2007, interest at 12.5%,
payable semi-annually in arrears on February 1 and August 1 ................ -- 155,000
Senior six-year $180.0 million revolving credit facility, payable by PM&C,
interest at PM&C's option at either the bank's base rate plus an
applicable margin or LIBOR plus an applicable margin (8.25% at
December 31, 1999 .......................................................... 27,500 142,500
Senior six-year $70.0 million revolving credit facility, payable by DTS,
interest at DTS' option at either the bank's base rate plus an applicable
margin or the Eurodollar Rate plus an applicable margin (10.04% at
December 31, 1999 .......................................................... 26,800 42,700
Senior six-year $20.0 million term loan facility, payable by DTS, interest at
DTS' option at either the bank's base rate plus an applicable margin or
the Eurodollar Rate plus an applicable margin .............................. 19,600 19,000
Series B Notes payable by PM&C, due 2005, interest at 12.5%, payable
semi-annually in arrears on January 1 and July 1, net of unamortized
discount of $2.6 million and $2.2 million as of December 31, 1998 and
1999, respectively ......................................................... 82,378 82,776
Series B Notes payable by DTS, due 2007, interest at 12.5%, payable
semi-annually in arrears on February 1 and August 1, net of unamortized
discount of $1.8 million as of December 31, 1998 ........................... 153,215 --
Mortgage payable, due 2000, interest at 8.75% ............................... 455 431
Sellers' notes, due 2000 to 2005, interest at 3% to 8% ...................... 33,538 26,648
Capital leases and other .................................................... 543 359
-------- --------
559,029 684,414
Less current maturities ..................................................... 14,399 15,488
-------- --------
Long-term debt .............................................................. $544,629 $668,926
======== ========
</TABLE>
Certain of the Company's sellers' notes are collateralized by stand-by
letters of credit issued pursuant to the PM&C Credit Facility and the DTS
Credit Facility.
DTS maintains a $70.0 million senior revolving credit facility and a $20.0
million senior term credit facility (collectively, the "DTS Credit Facility")
which expires in 2003 and is collateralized by substantially all of the assets
of DTS and its subsidiaries. The DTS Credit Facility is subject to certain
financial covenants as defined in the loan agreement, including a debt to
adjusted cash flow covenant. As of December 31, 1999, $10.4 million of stand-by
letters of credit were issued pursuant to the DTS Credit Facility, including
$2.6 million collateralizing certain of the Company's outstanding sellers'
notes.
PM&C maintains a $180.0 million senior revolving credit facility (the
"PM&C Credit Facility") which expires in 2003 and is collateralized by
substantially all of the assets of PM&C and its subsidiaries. The PM&C Credit
Facility is subject to certain financial covenants as defined in the loan
agreement, including a debt to adjusted cash flow covenant.
F-12
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Long-Term Debt: -- (Continued)
In November 1998, Pegasus completed an offering of senior notes (the
"9.75% Senior Notes Offering") in which it sold $100.0 million of its 9.75%
Series A Senior Notes due 2006 (the "9.75% Series A Notes"), resulting in net
proceeds to the Company of approximately $96.8 million. $64.0 million of the
net proceeds from the 9.75% Senior Notes Offering were used to repay a portion
of the outstanding indebtedness under the PM&C Credit Facility.
In November 1999, Pegasus exchanged its 12.5% Series A senior notes due
2007 (the "12.5% Series A Notes") for DTS' outstanding 12.5% Series B senior
subordinated notes due 2007 (the "DTS Series B Notes"), of which $155.0 million
in principal amount at maturity were outstanding (the "DTS Exchange Offer").
The 12.5% Series A Notes have substantially the same terms and provisions as
the DTS Series B Notes. Deferred financing fees related to the DTS Series B
Notes were written off, resulting in an extraordinary loss of approximately
$6.2 million on the refinancing transaction.
In December 1999, Pegasus entered into a $35.5 million interim letter of
credit facility (the "PCC Credit Facility"). As of December 31, 1999, $35.5
million of stand-by letters of credit were issued pursuant to the PCC Credit
Facility, including $19.5 million collateralizing certain of the Company's
outstanding sellers' notes.
The Company's publicly held notes may be redeemed, at the option of the
Company, in whole or in part, at various points in time after July 1, 2000 at
the redemption prices specified in the indentures governing the respective
notes, plus accrued and unpaid interest thereon.
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company to incur additional
indebtedness, create liens and to pay dividends.
At December 31, 1999, maturities of long-term debt and capital leases are
as follows (in thousands):
2000 ....................... $ 15,488
2001 ....................... 9,752
2002 ....................... 3,550
2003 ....................... 59,848
2004 ....................... 142,800
Thereafter ................. 452,976
--------
$684,414
========
F-13
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Earnings Per Common Share:
Calculation of basic and diluted earnings per common share:
The following table sets forth the computation of the number of shares
used in the computation of basic and diluted earnings per common share (in
thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- --------------
<S> <C> <C> <C>
Net loss applicable to common shares .................. ($ 31,487) ($ 93,881) ($ 201,519)
-------- -------- ---------
Weighted average common shares outstanding ............ 9,858 14,130 18,875
-------- -------- ---------
Total shares used for calculation of basic earnings per
common share ......................................... 9,858 14,130 18,875
Stock options ......................................... -- -- --
-------- -------- ---------
Total shares used for calculation of diluted earnings
per common share ..................................... 9,858 14,130 18,875
-------- -------- ---------
</TABLE>
Basic earnings per share amounts are based on net loss after deducting
preferred stock dividend requirements divided by the weighted average number of
Class A, Class B and Non-Voting Common Stock outstanding during the year.
For the years ended December 31, 1997, 1998 and 1999, net loss per common
share was determined by dividing net loss, as adjusted by the aggregate amount
of dividends on the Company's Series A Preferred Stock, approximately $12.2
million, $14.8 million and $16.7 million, respectively, by applicable shares
outstanding.
Securities that have not been issued and are antidilutive amounted to
approximately 582,000 shares in 1997, 1.3 million shares in 1998 and 1.8
million shares in 1999.
10. Leases:
The Company leases certain studios, towers, utility pole attachments, and
occupancy of underground conduits and headend sites under operating leases. The
Company also leases office space, vehicles and various types of equipment
through separate operating lease agreements. The operating leases expire at
various dates through 2004. Rent expense for the years ended December 31, 1997,
1998 and 1999 was $1.1 million, $1.6 million and $2.3 million, respectively.
The Company leases equipment under long-term leases and has the option to
purchase the equipment for a nominal cost at the termination of the leases. The
related obligations are included in long-term debt. Property and equipment at
December 31 include the following amounts for leases that have been capitalized
(in thousands):
1998 1999
-------- ---------
Equipment, furniture and fixtures .......... $ 662 $ 320
Vehicles ................................... 541 422
------ ------
1,203 742
Accumulated depreciation ................... (562) (322)
------ ------
Total .................................... $ 641 $ 420
====== ======
F-14
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Leases: -- (Continued)
Future minimum lease payments on noncancellable operating and capital
leases at December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
----------- --------
<S> <C> <C>
2000 ........................................................ $1,899 $192
2001 ........................................................ 1,629 153
2002 ........................................................ 1,108 58
2003 ........................................................ 682 2
2004 ........................................................ 609 --
Thereafter .................................................. 15 --
------ ----
Total minimum payments ...................................... $5,942 405
======
Less: amount representing interest .......................... 46
----
Present value of net minimum lease payments including current
maturities of $161 ......................................... $359
====
</TABLE>
11. Income Taxes:
The following is a summary of the components of income taxes from
continuing operations (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------------ ------------
<S> <C> <C> <C>
Federal -- deferred .............................. ($ 1,071) ($ 9,388)
State and local -- current ....................... $168 170 496
---- ------- -------
Provision (benefit) for income taxes .......... $168 ($ 901) ($ 8,892)
==== ======= =======
</TABLE>
The deferred income tax assets and liabilities recorded in the
consolidated balance sheets at December 31, 1998 and 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Assets:
Receivables ................................................. $ 216 $ 536
Excess of tax basis over book basis from tax gain recognized
upon incorporation of subsidiaries ......................... 2,112 --
Loss carryforwards .......................................... 56,700 125,856
Other ....................................................... 973 --
-------- --------
Total deferred tax assets .................................. 60,001 126,392
-------- --------
Liabilities:
Excess of book basis over tax basis of property, plant and
equipment ................................................... 1,907 4,383
Excess of book basis over tax basis of amortizable intangible
assets ..................................................... 78,765 85,927
-------- --------
Total deferred tax liabilities ............................. 80,672 90,310
-------- --------
Net deferred tax assets (liabilities) ......................... (20,671) 36,082
-------- --------
Valuation allowance ........................................ (48,121) (95,485)
-------- --------
Net deferred tax liabilities ................................ ($ 68,792) ($ 59,403)
======== ========
</TABLE>
F-15
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
11. Income Taxes: -- (Continued)
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized due to the expiration
of the Company's net operating loss carryforwards and portions of other
deferred tax assets related to prior acquisitions. The valuation allowance
increased primarily as the result of net operating loss carryforwards generated
during 1999, which may not be utilized.
At December 31, 1999, the Company has net operating loss carryforwards of
approximately $331.2 million which are available to offset future taxable
income and expire through 2018.
A reconciliation of the Federal statutory rate to the effective tax rate
is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
U.S. statutory federal income tax rate .......... 34.00% 35.00% 35.00%
Valuation allowance ............................. (34.38) (34.40) (30.24)
Other ........................................... 1.43 0.70 --
------ ------ ------
Effective tax rate .............................. 1.05% 1.30% 4.76%
====== ====== ======
</TABLE>
12. Supplemental Cash Flow Information:
Significant noncash investing and financing activities are as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------
1997 1998 1999
--------- ---------- ---------
<S> <C> <C> <C>
Barter revenue and related expense .................................. $ 7,520 $ 8,078 $ 7,598
Acquisition of program rights and assumption of related
program payables ................................................... 3,453 4,630 7,205
Acquisition of plant under capital leases ........................... 529 37 --
Capital contribution and related acquisition of intangibles ......... 15,198 123,241 1,364
Minority interest and related acquisition of intangibles ............ 3,000 -- --
Notes payable and related acquisition of intangibles ................ 7,114 219,889 6,467
Series A Preferred Stock dividend and reduction of paid-in
capital ............................................................ 12,215 14,763 16,706
Deferred taxes, net and related acquisition of intangibles .......... -- 82,934 29
</TABLE>
For the years ended December 31, 1997, 1998 and 1999 the Company paid cash
for interest in the amount of $13.5 million, $35.3 million and $70.8 million,
respectively. The Company paid no federal income taxes for the years ended
December 31, 1997, 1998 and 1999.
13. Acquisitions:
In 1998, the Company acquired (exclusive of the acquisition of DTS), from
26 independent DIRECTV providers, the rights to provide DIRECTV programming in
certain rural areas of the United States and the related assets in exchange for
total consideration of approximately $132.1 million, which consisted of $109.3
million in cash, 37,304 shares of the Company's Class A Common Stock (amounting
to $900,000), warrants to purchase a total of 25,000 shares of the Company's
Class A Common Stock (amounting to $222,000), $20.4 million in promissory notes
and $1.3 million in assumed net liabilities.
On April 27, 1998, the Company acquired DTS, which holds the rights to
provide DIRECTV programming in certain rural areas of eleven states, in
exchange for total consideration of approximately $363.9 million, which
consisted of approximately 5.5 million shares of the Company's Class A Common
Stock (amounting to $118.8 million), options and warrants to purchase a total
of 224,038 shares of the Company's Class A Common Stock (amounting to $3.3
million), approximately $158.9 million in assumed net liabilities and
approximately $82.9 million of a deferred tax liability.
F-16
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Acquisitions: -- (Continued)
In 1999, the Company acquired, from fifteen independent DIRECTV providers,
the rights to provide DIRECTV programming in certain rural areas of the United
States and the related assets in exchange for total consideration of
approximately $79.5 million, which consisted of $64.6 million in cash, 12,339
shares of PCC's Class A Common Stock (amounting to $550,000), warrants to
purchase a total of 25,000 shares of PCC's Class A Common Stock (amounting to
$814,000), $6.5 million in promissory notes, $6.7 million in accrued expenses
and $365,000 in assumed net liabilities.
The Company's 1999 acquisitions of rights to provide DIRECTV programming
were not significant, and accordingly, the pro forma impact of those
acquisitions has not been presented. Unaudited pro forma net revenues from
continuing operations, unaudited net loss and unaudited net loss applicable to
common shares for the year ended December 31, 1998 approximated $225.8 million,
$124.9 million and $149.0 million, respectively. This unaudited pro forma
information reflects the Company's 1998 acquisitions of rights to provide
DIRECTV programming and the disposition of the Cable segment as if each such
DBS territory and the Cable segment had been acquired or sold as of the
beginning of 1998 and includes the impact of certain adjustments, such as the
depreciation of fixed assets, amortization of intangibles, interest expense,
preferred stock dividends and related income tax effects. This information does
not purport to be indicative of what would have occurred had the
acquisitions/disposition been made on that date or of results which may occur
in the future.
14. Discontinued Operations:
Effective January 31, 1997, the Company sold substantially all the assets
of its New Hampshire cable system for approximately $6.9 million in cash, net
of certain selling costs and recognized a gain on the transaction of
approximately $4.5 million.
Effective July 1, 1998, the Company sold substantially all the assets of
its remaining New England cable systems for approximately $30.1 million in cash
and recognized a gain on the transaction of approximately $24.7 million.
Effective March 31, 1999, the Company purchased a cable system serving
Aguadilla, Puerto Rico and neighboring communities for approximately $42.1
million in cash. The Aguadilla cable system is contiguous to the Company's
other Puerto Rico cable system and the Company has consolidated the Aguadilla
cable system with its existing cable system.
On January, 10, 2000, the Company entered into a letter of intent to sell
its remaining Cable operations for $170.0 million in cash, subject to certain
adjustments. The Company anticipates closing this sale during the third quarter
of 2000. Accordingly, the results of operations from the entire Cable segment
have been classified as discontinued with prior years restated.
Net revenues and income from discontinued operations were as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
(unaudited)
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Net revenues .................................... $16,688 $13,767 $21,158
Income from operations .......................... 2,077 648 2,110
Provision for income taxes ...................... 32 5 --
Income from discontinued operations ............. 257 1,047 2,128
Gain on sale of discontinued operations ......... 4,451 24,727 --
</TABLE>
F-17
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
15. Financial Instruments:
The carrying values and fair values of the Company's financial instruments
at December 31, 1999 consisted of (in thousands):
<TABLE>
<CAPTION>
1998 1999
------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Long-term debt, including current portion . $559,029 $583,460 $684,414 $707,988
Series A Preferred Stock .................. 126,028 126,978 142,734 149,871
</TABLE>
Long-term debt: The fair value of long-term debt is estimated based on the
quoted market price for the same or similar instruments.
Series A Preferred Stock: The fair value of Series A Preferred Stock is
estimated based on the quoted market price for the same or similar instruments.
All other financial instruments are stated at cost which approximates fair
market value.
16. Warrants:
In 1998, in connection with the acquisition of DBS properties, the Company
issued warrants to purchase approximately 182,000 shares of Class A Common
Stock at exercise prices between $14.64 and $24.26 per share. These warrants
are exercisable through October 10, 2007. At December 31, 1999, warrants to
purchase approximately 119,000 shares of Class A Common Stock have been
exercised. The fair value of the warrants issued was estimated using the
Black-Scholes pricing model and was approximately $2.7 million. The value
assigned to these warrants increased the carrying amount of the DBS rights
acquired and was effected by an increase in paid-in-capital.
In 1999, in connection with the acquisition of DBS properties, the Company
issued warrants to purchase 25,000 shares of Class A Common Stock at an
exercise price of $24.18 per share. These warrants are exercisable through
April 13, 2004. At December 31, 1999, none of these warrants had been
exercised. The fair value of the warrants issued was estimated using the
Black-Scholes pricing model and was approximately $814,000. The value assigned
to these warrants increased the carrying amount of the DBS rights acquired and
was effected by an increase in paid-in-capital.
17. Employee Benefit Plans:
The Company has two active stock plans available to grant stock options
(the "Stock Option Plan") and restricted stock awards (the "Restricted Stock
Plan") to eligible employees, executive officers and non-employee directors of
the Company. The Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
stock plans. The Company has adopted the disclosure-only provisions of SFAS No.
123 "Accounting for Stock-Based Compensation" ("SFAS 123").
Stock Option Plan
The Stock Option Plan provides for the granting of nonqualified and
qualified options to purchase a maximum of 1,300,000 shares (subject to
adjustment to reflect stock dividends, stock splits, recapitalizations and
similar changes in the capitalization of Pegasus) of Class A Common Stock of
the Company. The Stock Option Plan terminates in September 2006. As of December
31, 1999, options to purchase an aggregate of approximately 1.3 million shares
of Class A Common Stock at exercise prices between $11.00 and $80.88 were
outstanding. All options granted under the Stock Option Plan have been granted
at fair market value at the time of grant.
F-18
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
17. Employee Benefit Plans: -- (Continued)
The following table summarizes information about the Company's stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Weighted Exercisable Weighted
Range of at 12/31/99 Average at 12/31/99 Average
Exercise Price (in thousands) Exercise Price (in thousands) Exercise Price
- ------------------ ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
$11-$19 242 $ 11.37 124 $ 11.66
20-29 338 22.51 186 22.87
30-39 372 39.48 25 39.50
40-49 50 42.32 -- --
80-81 315 80.88 -- --
------- --- -------- --- --------
$11-$81 1,317 $ 39.97 335 $ 19.97
======= ===== ======== === ========
</TABLE>
Under SFAS 123, companies can either continue to account for stock
compensation plans pursuant to existing accounting standards or elect to
expense the value derived from using an option pricing model. The Company is
continuing to apply existing accounting standards. However, SFAS 123 requires
disclosures of pro forma net income and earnings per share as if the Company
had adopted the expensing provisions of SFAS 123.
The fair value of options was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions for 1997, 1998
and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Risk-free interest rate ................. 6.35% 5.11% 5.56%
Dividend Yield .......................... 0.00% 0.00% 0.00%
Volatility Factor ....................... 0.403 0.479 0.536
Weighted average expected life .......... 5 years 4.5 years 4.4 years
</TABLE>
Pro forma net losses for 1997, 1998 and 1999 would have been $31.7
million, $94.7 million and $205.2 million, respectively; pro forma net losses
per common share for 1997, 1998 and 1999 would have been $3.22, $6.70 and
$10.87, respectively. The weighted average fair value of options granted were
$4.99, $11.19 and $26.74 for 1997, 1998 and 1999, respectively.
The following table summarizes stock option activity over the past three
years:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
------------- ---------------
<S> <C> <C>
Outstanding at January 1, 1997 ................... 3,385 $ 14.00
Granted .......................................... 220,000 11.00
------- --------
Outstanding at December 31, 1997 ................. 223,385 11.05
Granted .......................................... 418,842 21.23
------- --------
Outstanding at December 31, 1998 ................. 642,227 17.69
Granted .......................................... 797,346 55.58
Exercised ........................................ (83,577) 18.99
Canceled or expired .............................. (38,667) 37.09
------- --------
Outstanding at December 31, 1999 ................. 1,317,329 $ 39.97
========= ========
Options exercisable at December 31, 1997 ......... 3,385 $ 14.00
Options exercisable at December 31, 1998 ......... 143,728 15.09
Options exercisable at December 31, 1999 ......... 334,807 19.97
</TABLE>
F-19
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
17. Employee Benefit Plans: -- (Continued)
Restricted Stock Plan
The Restricted Stock Plan provides for the granting of four types of
restricted stock awards representing a maximum of 350,000 shares (subject to
adjustment to reflect stock dividends, stock splits, recapitalizations and
similar changes in the capitalization of Pegasus) of Class A Common Stock of
the Company to eligible employees who have completed at least one year of
service. Restricted stock received under the Restricted Stock Plan vests based
on years of service with the Company and are fully vested for employees who
have four years of service with the Company, with the exception of special
recognition awards which are fully vested on the date of grant. The Restricted
Stock Plan terminates in September 2006. As of December 31, 1999, approximately
184,000 shares of Class A Common Stock had been granted under the Restricted
Stock Plan. The expense for this plan amounted to $823,000, $763,000 and
$819,000 in 1997, 1998 and 1999, respectively.
401(k) Plans
Substantially all Company employees who, as of the enrollment date under
the 401(k) plans, have completed at least one year of service with the Company
are eligible to participate in one of the 401(k) plans. Participants may make
salary deferral contributions of 2% to 6% of their salary to the 401(k) plans.
The Company may make three types of contributions to the 401(k) plans,
each allocable to a participant's account if the participant completes at least
1,000 hours of service in the applicable plan year, and is employed on the last
day of the applicable plan year. Discretionary Company contributions and
Company matches of employee salary deferral contributions and rollover
contributions are made in the form of Class A Common Stock, or in cash used to
purchase Class A Common Stock. The Company has authorized and reserved for
issuance up to 205,000 shares of Class A Common Stock in connection with the
401(k) plans. Company contributions to the 401(k) plans are subject to
limitations under applicable laws and regulations. All employee contributions
to the 401(k) plans are fully vested at all times and all Company
contributions, if any, vest based on years of service with the Company and are
fully vested for employees who have four years of service with the Company. A
participant also becomes fully vested in Company contributions to the 401(k)
plans upon attaining age 65 or upon his or her death or disability. The expense
for these plans amounted to $451,000, $689,000 and $1.2 million in 1997, 1998
and 1999, respectively.
18. Commitments and Contingent Liabilities:
Legal Matters:
The Company has been sued in Indiana for allegedly charging DBS
subscribers excessive fees for late payments. The plaintiffs, who purport to
represent a class consisting of residential DIRECTV customers in Indiana, seek
unspecified damages for the purported class and modification of the Company's
late-fee policy. The Company is advised that similar suits have been brought
against DIRECTV and various cable operators in other parts of the United
States.
From time to time the Company is involved with claims that arise in the
normal course of business.
In the opinion of management, the ultimate liability with respect to the
aforementioned claims and matters will not have a material adverse effect on
the consolidated operations, liquidity, cash flows or financial position of the
Company.
The Company is a rural affiliate of the National Rural Telecommunications
Cooperative ("NRTC"). The NRTC is a cooperative organization whose members and
associates are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the United States. The Company's
ability to distribute DIRECTV programming services is dependent upon agreements
between the NRTC and Hughes and between the Company and the NRTC.
F-20
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
18. Commitments and Contingent Liabilities: -- (Continued)
On June 3, 1999, the NRTC filed a lawsuit in federal court against DIRECTV
seeking a court order to enforce the NRTC's contractual rights to obtain from
DIRECTV certain premium programming formerly distributed by United States
Satellite Broadcasting Company, Inc. for exclusive distribution by the NRTC's
members and affiliates in their rural markets. On July 22, 1999, DIRECTV
responded to the NRTC's continuing lawsuit by rejecting the NRTC's claims to
exclusive distribution rights and by filing a counterclaim seeking judicial
clarification of certain provisions of DIRECTV's contract with the NRTC. In
particular, DIRECTV contends in its counterclaim that the term of DIRECTV's
contract with the NRTC is measured solely by the orbital life of DBS-1, the
first DIRECTV satellite launched into orbit at the 101o W orbital location,
without regard to the orbital lives of the other DIRECTV satellites at the 101o
W orbital location. DIRECTV also alleges in its counterclaim that the NRTC's
right of first refusal, which is effective at the end of the term of DIRECTV's
contract with the NRTC, does not provide for certain programming and other
rights comparable to those now provided under the contract.
On August 26, 1999, the NRTC filed a separate lawsuit in federal court
against DIRECTV claiming that DIRECTV has failed to provide to the NRTC its
share of launch fees and other benefits that DIRECTV and its affiliates have
received relating to programming and other services. On September 9, 1999, the
NRTC filed a response to DIRECTV's counterclaim contesting DIRECTV's
interpretations of the end of term and right of first refusal provisions.
On January 10, 2000, the Company and Golden Sky Systems, Inc. ("Golden
Sky", a subsidiary of Golden Sky Holdings, Inc.) filed a lawsuit in federal
court against DIRECTV which contains causes of action for various torts, common
counts and declaratory relief based on DIRECTV's failure to provide the NRTC
with premium programming, thereby preventing the NRTC from providing this
programming to the Company and Golden Sky. The claims are also based on
DIRECTV's position with respect to launch fees and other benefits, term and
rights of first refusal. The complaint seeks monetary damages and a court order
regarding the rights of the NRTC and its members and affiliates.
Management is not currently able to predict the outcome of the DIRECTV
litigation matters or the effect such outcome will have on the consolidated
operations, liquidity, cash flows or financial position of the Company.
Commitments:
The Company has entered into a multi-year agreement with a provider of
integrated marketing, information and transaction services to provide customer
relationship management services which will significantly increase the
Company's existing call center capacity. The initial term of the agreement ends
on December 31, 2004. Beginning January 1, 2000, the Company must pay minimum
fees to the provider as follows (in thousands):
Annual
Minimum
Year Fees
- ------------------------------------------ ----------
2000 ................................... $12,600
2001 ................................... 18,216
2002 ................................... 20,250
2003 ................................... 20,250
2004. .................................. 20,250
-------
Total minimum payments ................. $91,566
=======
Program Rights:
The Company has entered into agreements totaling $7.4 million as of
December 31, 1999 for film rights and programs that are not yet available for
showing at December 31, 1999, and accordingly, are not recorded by the Company.
At December 31, 1999, the Company has commitments for future program rights of
approximately $3.3 million, $1.4 million, $214,000 and $87,000 in 2000, 2001,
2002 and 2003.
F-21
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
19. Related Party Transactions:
The Company entered into an arrangement in 1998 with W.W. Keen Butcher
(the stepfather of Marshall W. Pagon, the Company's President and Chief
Executive Officer, and Nicholas A. Pagon, a Vice President of Pegasus), certain
entities controlled by him (the "KB Companies") and the owner of a minority
interest in one of the KB Companies, under which the Company agreed to provide
and maintain collateral for up to $4.0 million in principal amount of bank
loans to Mr. Butcher and the minority owner. The agreement was recently amended
to increase the amount of collateral that the Company will maintain for such
loans to up to $8.0 million. Mr. Butcher and the minority owner must lend or
contribute the proceeds of those bank loans to one or more of the KB Companies
for the acquisition of television broadcast stations to be operated by the
Company pursuant to local marketing agreements. As of December 31, 1998 and
1999, the Company had provided collateral of $1.6 million and $2.4 million
pursuant to this arrangement, respectively, which is included as restricted
cash on the Company's consolidated balance sheets.
William P. Phoenix, a director of Pegasus since June 1998, is a managing
director of CIBC World Markets Corporation ("CIBC"). CIBC and its affiliates
have provided various services to the Company since the beginning of 1997,
including serving as one of the initial purchasers in the 9.75% Senior Notes
Offering, providing a fair market value appraisal in connection with the
contribution to Pegasus of certain assets between related parties, providing
fairness opinions in connection with an acquisition and certain intercompany
transactions, acting as a standby purchaser in connection with DTS' offer to
repurchase the DTS Notes as a result of the change of control arising by
Pegasus' acquisition of DTS, acting as a dealer manager in connection with the
DTS Exchange Offer, issuing letters of credit pursuant to the PCC Credit
Facility and acting as an Administrative Agent in connection with the DTS
Credit Facility. Total fees and expenses were approximately $3.3 million and
$940,000 for the years ended December 31, 1998 and 1999, respectively.
In 1999, Pegasus loaned $199,999 to Nicholas A. Pagon, Pegasus' Vice
President of Broadcast Operations, bearing interest at the rate of 6% per
annum, with the principal amount due on the fifth anniversary of the date of
the promissory note. Mr. Pagon is required to use half of the proceeds of the
loan to purchase shares of Class A Common Stock, and the loan is collateralized
by those shares. The balance of the loan proceeds may be used at Mr. Pagon's
discretion.
20. Industry Segments:
The Company operates in growing segments of the media industry: DBS and
Broadcast. DBS consists of providing direct broadcast satellite television
services to customers in certain rural areas of 36 states. Broadcast consists
of ten television stations affiliated with Fox, UPN and the WB and two
transmitting towers, all located in the eastern United States.
All of the Company's revenues are derived from external customers. Capital
expenditures for the Company's DBS segment were $506,000, $2.0 million and $3.6
million for 1997, 1998 and 1999, respectively. Capital expenditures for the
Company's Broadcast segment were $6.4 million, $6.8 million and $4.1 million
for 1997, 1998 and 1999, respectively. Capital expenditures for the Company's
discontinued Cable segment were $2.9 million, $2.0 million and $5.6 million for
1997, 1998 and 1999, respectively. All other capital expenditures for 1997,
1998 and 1999 were at the corporate level. Identifiable total assets for the
Company's DBS segment were $715.6 million and $701.9 million as of December 31,
1998 and 1999, respectively. Identifiable total assets for the Company's
Broadcast segment were $67.1 million and $70.6 million as of December 31, 1998
and 1999, respectively. Identifiable total assets for the Company's
discontinued Cable segment were $47.0 million and $86.5 million as of December
31, 1998 and 1999, respectively. All other identifiable assets as of December
31, 1998 and 1999 were at the corporate level.
21. Subsequent Events (unaudited):
In January 2000, the Company entered into a an agreement and plan of
merger to acquire Golden Sky Holdings, Inc. ("GSH"), for approximately 6.5
million shares of the Company's Class A Common Stock and
F-22
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
21. Subsequent Events (unaudited): -- (Continued)
the assumed net liabilities of GSH. As of December 31, 1999, GSH's operations
consisted of providing DIRECTV services to approximately 345,200 subscribers in
certain rural areas of 24 states in which GSH holds the exclusive rights to
provide such services. Upon completion of the acquisition of GSH, GSH will
become a wholly owned subsidiary of Pegasus.
In January 2000, the Company made an investment in Personalized Media
Communications, LLC ("PMC"), an advanced communications technology company, of
approximately $111.8 million, which consisted of $14.3 million in cash, 200,000
shares of the Company's Class A Common Stock (amounting to $18.8 million) and
Pegasus' agreement, subject to certain conditions, to issue warrants to
purchase 1.0 million shares of the Company's Class A Common Stock at an
exercise price of $90.00 per share and with a term of ten years. The fair value
of the warrants to be issued was estimated using the Black-Scholes pricing
model and is approximately $78.8 million. A subsidiary of PMC granted to
Pegasus an exclusive license for use of PMC's patent portfolio in the
distribution of satellite services from specified orbital locations. Mary C.
Metzger, Chairman of PMC and a member of the Company's board of directors, and
John C. Harvey, Managing Member of PMC and Ms. Metzger's husband, own a
majority of and control PMC.
In January 2000, PM&C entered into a first amended and restated credit
facility, which consists of a $225.0 million senior revolving credit facility
which expires in 2004 and a $275.0 million senior term credit facility which
expires in 2005 (collectively, the "New PM&C Credit Facility"). The New PM&C
Credit Facility amends the PM&C Credit Facility, is collateralized by
substantially all of the assets of PM&C and its subsidiaries and is subject to
certain financial covenants as defined in the loan agreement, including a debt
to adjusted cash flow covenant. Borrowings under the New PM&C Credit Facility
can be used for acquisitions and general corporate purposes.
Commensurate with the closing of the New PM&C Credit Facility, the Company
borrowed $275.0 million under the term loan, outstanding balances under the
PM&C Credit Facility, the DTS Credit Facility, and the PCC Credit Facility were
repaid and commitments under the DTS Credit Facility and the PCC Credit
Facility were terminated. Additionally, in connection with the closing of the
New PM&C Credit Facility, DTS was merged with and into a subsidiary of PM&C.
In January 2000, Pegasus issued 5,707 shares of its Series B junior
convertible participating preferred stock, with a liquidation preference of
$1,000 per share plus any accrued but unpaid dividends (the "Series B Preferred
Stock"), as part of an acquisition of DIRECTV distribution rights from an
independent DIRECTV provider. Each share of Series B Preferred Stock will
initially be convertible at the option of the holder into 16.24 shares of the
Company's Class A Common Stock.
In January 2000, Pegasus completed an offering of 3,000,000 shares of its
6.5% Series C convertible preferred stock, with a liquidation preference of
$100 per share plus any accrued but unpaid dividends (the "Series C Preferred
Stock"). Each share of Series C Preferred Stock will initially be convertible
at the option of the holder into 0.7843 shares of the Company's Class A Common
Stock. Pegasus may redeem the Series C Preferred Stock on or after August 1,
2001, subject to certain conditions, at redemption prices set forth in the
certificate of designation, plus accumulated and unpaid dividends, if any.
In February 2000, Pegasus issued approximately 22,500 shares of its Series
D junior convertible participating preferred stock, with a liquidation
preference of $1,000 per share plus any accrued but unpaid dividends (the
"Series D Preferred Stock"), as part of an acquisition of DIRECTV distribution
rights from an independent DIRECTV provider. Each share of Series D Preferred
Stock will initially be convertible at the option of the holder into 9.77
shares of the Company's Class A Common Stock.
As of February 11, 2000, the Company acquired, from two independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of California, Indiana and Oregon and the related
F-23
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
assets in exchange for total consideration of approximately $35.0 million,
which consisted of $11.9 million in cash, 22,500 shares of the Company's Series
D Preferred Stock (amounting to $22.5 million), $200,000 in promissory notes,
payable over two years, and $381,000 in assumed net liabilities.
22. Quarterly Information (unaudited):
The net revenues and loss from operations data provided in the tables
below are from continuing operations and therefore will not necessarily agree
to quarterly information previously reported.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
------------ ------------ --------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1999
- ----
Net revenues ................................. $ 66,285 $ 73,740 $ 84,668 $ 98,075
Loss from operations ......................... (27,218) (30,546) (39,788) (28,354)
Loss before extraordinary items .............. (45,925) (48,672) (56,432) (44,312)
Net loss applicable to common shares ......... (45,925) (48,672) (56,432) (50,490)
Basic and diluted earnings per share:
Loss from operations ......................... $ (1.66) $ (1.56) $ (2.02) $ (1.44)
Loss before extraordinary items .............. (2.81) (2.48) (2.86) (2.24)
Net loss ..................................... (2.81) (2.48) (2.86) (2.56)
</TABLE>
For the fourth quarter of 1999, the Company had an extraordinary loss of
approximately $6.2 million or $0.32 per share in connection with the DTS
Exchange Offer.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
------------ ------------ --------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1998
- ----
Net revenues ................................. $ 24,389 $ 42,162 $ 52,659 $ 62,243
Loss from operations ......................... (7,053) (9,967) (18,993) (26,806)
Loss before extraordinary items .............. (15,936) (22,804) (10,752) (44,389)
Net loss applicable to common shares ......... (15,936) (22,804) (10,752) (44,389)
Basic and diluted earnings per share:
Loss from operations ......................... $ (0.68) $ (0.70) $ (1.19) $ (1.69)
Loss before extraordinary items .............. (1.54) (1.59) (0.68) (2.79)
Net loss ..................................... (1.54) (1.59) (0.68) (2.79)
</TABLE>
The Company had no extraordinary gains or losses for the year ended
December 31, 1998.
F-24
<PAGE>
Independent Auditors' Report
Board of Directors and Investors
Golden Sky Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Golden Sky
Holdings, Inc. as of December 31, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Golden Sky
Holdings, Inc. as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
February 14, 2000
Kansas City, Missouri
F-25
<PAGE>
GOLDEN SKY HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents .................................................. $ 4,488 $ 3,270
Restricted cash, current portion ........................................... 28,083 23,731
Subscriber receivables (net of allowance for uncollectible accounts of $293
and $973, respectively) .................................................. 8,632 12,333
Other receivables .......................................................... 2,465 742
Inventory .................................................................. 10,146 3,108
Prepaid expenses and other ................................................. 1,859 1,652
---------- ----------
Total current assets ........................................................ 55,673 44,836
Restricted cash, net of current portion ..................................... 23,534 --
Property and equipment (net of accumulated depreciation of $3,214 and $5,918,
respectively) .............................................................. 4,994 5,853
Intangible assets, net ...................................................... 233,139 236,926
Deferred financing costs .................................................... 10,541 11,462
Other assets ................................................................ 218 260
---------- ----------
Total assets ............................................................. $ 328,099 $ 299,337
========== ==========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Trade accounts payable ..................................................... $ 13,539 $ 22,893
Interest payable ........................................................... 11,009 11,679
Current maturities of long-term obligations ................................ 8,916 3,248
Unearned revenue ........................................................... 5,574 8,669
Accrued payroll and other .................................................. 1,391 933
---------- ----------
Total current liabilities ................................................... 40,429 47,422
Long-term obligations, net of current maturities:
12 3/8% Notes .............................................................. 195,000 195,000
13 1/2% Notes .............................................................. -- 112,095
Bank debt .................................................................. 67,000 52,000
Seller notes payable ....................................................... 6,912 6,932
Other notes payable and obligations under capital leases ................... 376 103
Minority interest .......................................................... 2,420 936
---------- ----------
Total long-term obligations, net of current maturities ...................... 271,708 367,066
---------- ----------
Total liabilities ........................................................... 312,137 414,488
Mandatorily Redeemable Preferred Stock:
Series A Convertible Participating Preferred Stock, par value $.01; 418,000
shares authorized, issued and outstanding ................................ 56,488 65,135
Series B Convertible Participating Preferred Stock, par value $.01; 228,500
shares authorized, 228,442 shares issued and outstanding ................. 53,489 61,677
Series C Senior Convertible Preferred Stock, par value $.01; 51,000 shares
authorized, issued and outstanding ....................................... 10,455 11,540
---------- ----------
120,432 138,352
Commitments and contingencies
Stockholders' Equity (Deficit):
Common Stock, par value $.01; 1,000,000 shares authorized, 24,931 shares
issued and outstanding at December 31, 1998; 25,399 shares issued and
outstanding at December 31, 1999 ......................................... -- --
Additional paid-in capital ................................................. 25 179
Accumulated deficit ........................................................ (104,495) (253,682)
---------- ----------
Total stockholders' equity (deficit) ........................................ (104,470) (253,503)
---------- ----------
Total liabilities and stockholders' equity (deficit) ..................... $ 328,099 $ 299,337
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-26
<PAGE>
GOLDEN SKY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
Revenue:
DBS services ............................................ $ 16,452 $ 74,910 $ 139,933
Lease and other ......................................... 944 1,014 640
--------- --------- ----------
Total revenue ............................................ 17,396 75,924 140,573
Costs and expenses:
Costs of DBS services ................................... 9,304 45,291 88,690
System operations ....................................... 3,796 11,021 19,733
Sales and marketing ..................................... 7,316 32,201 64,933
General and administrative .............................. 2,331 7,431 15,708
Depreciation and amortization ........................... 7,300 23,166 35,963
--------- --------- ----------
Total costs and expenses ................................. 30,047 119,110 225,027
--------- --------- ----------
Operating loss ........................................... (12,651) (43,186) (84,454)
Non-operating items:
Interest and investment income .......................... 40 1,573 2,393
Interest expense ........................................ (3,246) (20,538) (45,012)
Merger, initial public offering and other non-operating
expenses .............................................. -- -- (1,259)
--------- --------- ----------
Total non-operating items ................................ (3,206) (18,965) (43,878)
--------- --------- ----------
Loss before income taxes ................................. (15,857) (62,151) (128,332)
Income taxes ............................................. -- -- --
--------- --------- ----------
Loss before extraordinary charge ......................... (15,857) (62,151) (128,332)
Extraordinary charge on early retirement of debt ......... -- (2,577) (2,935)
--------- --------- ----------
Net loss ................................................. (15,857) (64,728) (131,267)
Preferred stock dividend requirements .................... (7,888) (14,855) (17,920)
--------- --------- ----------
Net loss attributable to common shareholders ............. $ (23,745) $ (79,583) $ (149,187)
========= ========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-27
<PAGE>
GOLDEN SKY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated
Stock Capital Deficit Total
-------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 ............................... $ -- $ 1 $ (1,167) $ (1,166)
Cancellation of originally issued Golden Sky Systems
Common Stock .............................................. -- (1) -- (1)
Issuance of 100 shares of Golden Sky Holdings Common
Stock upon formation of Golden Sky Holdings, Inc. ......... -- -- -- --
Dividends accrued on Series A Preferred Stock .............. -- -- (7,189) (7,189)
Dividends accrued on Series B Preferred Stock .............. -- -- (699) (699)
Net loss ................................................... -- -- (15,857) (15,857)
---- ------ ---------- -----------
Balance at December 31, 1997 ............................... -- -- (24,912) (24,912)
Issuance of 24,831 shares of Golden Sky Holdings
Common Stock pursuant to stock options exercised .......... -- 25 -- 25
Dividends accrued on Series A Preferred Stock .............. -- -- (7,499) (7,499)
Dividends accrued on Series B Preferred Stock .............. -- -- (7,101) (7,101)
Dividends accrued on Series C Preferred Stock .............. -- -- (255) (255)
Net loss ................................................... -- -- (64,728) (64,728)
---- ------ ---------- -----------
Balance at December 31, 1998 ............................... -- 25 (104,495) (104,470)
Issuance of 468 shares of Golden Sky Holdings Common
Stock pursuant to stock options exercised ................. -- -- -- --
Dividends accrued on Series A Preferred Stock .............. -- -- (8,647) (8,647)
Dividends accrued on Series B Preferred Stock .............. -- -- (8,188) (8,188)
Dividends accrued on Series C Preferred Stock .............. -- -- (1,085) (1,085)
Deferred compensation pursuant to issuance of Common
Stock options ............................................. -- 154 -- 154
Net loss ................................................... -- -- (131,267) (131,267)
---- ------ ---------- -----------
Balance at December 31, 1999 ............................... $ -- $179 $ (253,682) $(253,503)
==== ====== ========== ===========
</TABLE>
See accompanying Notes to Consolidated FInancial Statements.
F-28
<PAGE>
GOLDEN SKY HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1997 1998 1999
-------------- -------------- ---------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss ...................................................................... $ (15,857) $ (64,728) $ (131,267)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................ 7,300 23,166 35,963
Amortization of debt discount, deferred financing costs and other ............ 215 977 13,676
Deferred compensation pursuant to issuance of Common Stock options ........... -- -- 154
Extraordinary charge on early retirement of debt ............................. -- 2,577 2,935
Change in operating assets and liabilities, net of acquisitions:
Subscriber receivables, net of unearned revenue ............................ (2,501) (1,757) (541)
Other receivables .......................................................... (161) (1,568) 1,188
Inventory .................................................................. (1,604) (8,049) 7,038
Prepaid expenses and other ................................................. (203) (1,228) 207
Trade accounts payable ..................................................... 7,515 5,068 9,354
Interest payable ........................................................... 806 10,223 670
Accrued payroll and other .................................................. 1,379 (1,270) (478)
---------- ---------- -----------
Net cash used in operating activities ......................................... (3,111) (36,589) (61,101)
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets ......................................... (120,051) (104,487) (35,339)
Purchases of minority interests ............................................... -- -- (1,439)
Proceeds from interest escrow account ......................................... -- (51,617) 24,224
Release of amounts reserved for contingent reduction of bank debt ............. -- -- 5,449
Investment earnings placed in escrow .......................................... -- -- (1,787)
Purchases of property and equipment ........................................... (998) (3,317) (3,452)
Other ......................................................................... 320 (500) 112
---------- ---------- -----------
Net cash used in investing activities ......................................... (120,729) (159,921) (12,232)
Cash Flows From Financing Activities
Proceeds from issuance of Series A preferred stock ............................ 35,489 -- --
Proceeds from bridge loan ..................................................... 10,000 -- --
Proceeds from issuance of Series B preferred stock ............................ 35,616 -- --
Net proceeds from issuance of 123/8% Notes .................................... -- 189,150 --
Net proceeds from issuance of 131/2% Notes .................................... -- -- 100,049
Borrowings on bank debt ....................................................... 75,000 90,000 38,000
Principal payments on bank debt ............................................... (15,000) (83,000) (53,000)
Proceeds from issuance of notes payable ....................................... 2,115 -- --
Principal payments on notes payable and obligations under capital leases ...... (2,902) (3,675) (8,846)
Proceeds from issuance of Common Stock ........................................ -- 25 --
Increase in deferred financing costs .......................................... (3,321) (5,138) (5,516)
Capital contribution from minority partner .................................... -- -- 1,428
---------- ---------- -----------
Net cash provided by financing activities ..................................... 136,997 187,362 72,115
---------- ---------- -----------
Net increase (decrease) in cash and cash equivalents ......................... 13,157 (9,148) (1,218)
Cash and cash equivalents, beginning of period ............................... 479 13,636 4,488
---------- ---------- -----------
Cash and cash equivalents, end of period ..................................... $ 13,636 $ 4,488 $ 3,270
========== ========== ===========
Supplemental Disclosure of Cash Flow Information
Cash paid for interest ........................................................ $ 2,225 $ 9,337 $ 30,014
Property and equipment acquired under capitalized lease obligations ........... 554 609 78
Retirement of Credit Agreement from borrowings under the Credit
Facility ..................................................................... -- 88,000 --
Issuance of seller notes payable in acquisitions .............................. 8,600 10,157 --
Conversion of notes payable and subscriptions to Series A preferred stock ..... 6,311 -- --
Conversion of notes payable to Series B preferred stock ....................... 10,073 -- --
Issuance of note payable in purchase of minority interest ..................... -- -- 2,925
Series C preferred stock issued in acquisition ................................ -- 10,200 --
Preferred dividend requirements accrued and unpaid ............................ 7,888 14,855 17,920
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-29
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Nature of Operations
Organization and Legal Structure
Golden Sky Holdings, Inc. ("Holdings," and together with its subsidiaries,
"Golden Sky") is a Delaware corporation formed on September 9, 1997 for the
purpose of holding all the common and preferred stock of Golden Sky Systems,
Inc. ("Systems"). Upon the formation of Holdings, Systems issued 1,000 shares
of its common stock to Holdings and all the shareholders of the then
outstanding preferred stock of Systems were issued equivalent shares of
Holdings stock with identical features to Systems' preferred stock (the
"Exchange"). The Exchange was accounted for as a reorganization of entities
under common control and the historical cost basis of consolidated assets and
liabilities was not affected by the transaction. Holdings has no significant
assets or liabilities other than its investment in Systems. Accordingly,
Systems has been treated as the predecessor to Holdings and the historical
financial statements of Holdings presented for periods prior to September 9,
1997 are those of Systems.
Until February 1999, Systems was a wholly-owned subsidiary of Holdings. On
February 2, 1999, Golden Sky DBS, Inc. ("Golden Sky DBS") was formed for the
purpose of effecting an offering of senior discount notes. Upon formation,
Golden Sky DBS issued 100 shares of its common stock to Holdings in exchange
for $100 and the subsequent transfer of all of the capital stock of Systems to
Golden Sky DBS. Upon completion of the aforementioned transfer, Systems became
a wholly-owned subsidiary of Golden Sky DBS.
Principal Business
Systems is the second largest independent provider of DIRECTV subscription
television services. DIRECTV is the leading direct broadcast satellite ("DBS")
company serving the continental United States. Systems, a Delaware corporation
formed on June 25, 1996 ("Inception"), is a non-voting affiliate of the
National Rural Telecommunications Cooperative (the "NRTC"). The NRTC has
contracted with Hughes Communications Galaxy, Inc. ("Hughes") for the exclusive
right to distribute DIRECTV programming to homes in certain rural territories
of the United States ("Rural DIRECTV Markets"). As of December 31, 1999,
Systems had acquired 57 Rural DIRECTV Markets in 24 states with approximately
1.9 million households. As of that same date, Systems served approximately
345,200 subscribers.
Pegasus Merger
Holdings entered into a definitive merger agreement with Pegasus
Communications Corporation ("Pegasus") on January 10, 2000. Pegasus is the
largest independent provider of DIRECTV subscription television services in the
United States. The combined operations of Pegasus and Holdings will serve in
excess of 1.1 million subscribers in 41 states and have the exclusive right to
serve approximately 7.2 million rural households. Under the terms of the
agreement, Pegasus will issue up to 6.5 million shares of its Class A common
stock to Holdings shareholders. The value of the Pegasus shares to be issued to
Holdings shareholders approximated $632 million as of the date of execution of
the definitive merger agreement. Upon completion of the merger, Holdings will
become a wholly owned subsidiary of Pegasus. Consummation of the merger, which
is subject to certain conditions and approvals, is expected in the first or
second quarter of 2000.
Significant Risks and Uncertainties
Substantial Leverage. Golden Sky is highly leveraged, making it vulnerable
to changes in general economic conditions and interest rates. As of December
31, 1999, Golden Sky had outstanding long-term debt (including current portion)
totaling approximately $369.4 million. Substantially all of Golden Sky's assets
are pledged as collateral on its long-term debt. Further, the terms associated
with Golden Sky's long-term debt obligations significantly restrict its ability
to incur additional indebtedness. Thus, it may be difficult for Golden Sky and
its subsidiaries to obtain additional debt financing if desired or required in
order to further implement Golden Sky's business strategy.
F-30
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. Organization and Nature of Operations -- (Continued)
Expected Operating Losses. Due to the substantial expenditures required to
acquire Rural DIRECTV Markets and subscribers, Golden Sky has sustained
significant losses since Inception. Golden Sky's operating losses were $12.7
million, $43.2 million, and $84.5 million for the years ended December 31,
1997, 1998 and 1999 respectively. Golden Sky's net losses during those same
periods aggregated $15.9 million, $64.7 million, and $131.3 million
respectively. Improvement in Golden Sky's results of operations is principally
dependent upon its ability to cost effectively expand its subscriber base,
control subscriber churn (i.e., the rate at which subscribers terminate
service), and effectively manage its operating and overhead costs. Golden Sky
plans to reduce its future operating and overhead costs by transitioning its
direct sales distribution model to an indirect (i.e., retail) distribution
model. Accordingly, during the year ending December 31, 2000 Golden Sky plans,
among other things, to: (i) close approximately 30 of its 68 local sales
offices; (ii) reduce its corporate overhead expenses through headcount and
other expense reductions; and (iii) increase the number of third-party
retailers in its Rural DIRECTV Markets. Golden Sky estimates that it will incur
aggregate, non-recurring costs of approximately $1.5 million in connection with
these actions. These costs are expected to primarily consist of employee
severance and lease termination expenses. There can be no assurance that Golden
Sky will be effective with regard to these plans. Golden Sky incurs significant
costs to acquire DIRECTV subscribers. The high cost of obtaining new
subscribers magnifies the negative effects of subscriber churn. Golden Sky
anticipates that it will continue to experience operating losses through at
least 2000. There can be no assurance that such operating losses will not
continue beyond 2000 or that Golden Sky's operations will generate sufficient
cash flows to pay its obligations, including its obligations on its long-term
debt.
Restrictions on Dividends and Other Distributions. The ability of Systems
and its subsidiaries to pay dividends and make other distributions and advances
is subject to, among other things, the terms of its long-term debt obligations
and applicable law. As a result, Systems may be limited in its ability to make
dividend payments and other distributions to Golden Sky DBS or Holdings at the
time such distributions are needed by Golden Sky DBS or Holdings to meet their
obligations.
Reliance on DIRECTV/NRTC. Golden Sky obtains substantially all of its
revenue from the distribution of DIRECTV programming services. As a result,
Golden Sky would be materially adversely affected by any material change in the
assets, financial condition, programming, technological capabilities or
services of DIRECTV or Hughes. Further, Golden Sky relies upon DIRECTV to
continue to provide programming services on a basis consistent with its past
practice. Any change in such practice due to, for example, a failure to replace
a satellite upon the expiration of its useful orbital life or a delay in
launching a successor satellite may prevent Golden Sky from continuing to
provide DBS services and could have a material adverse effect on Golden Sky's
financial condition and results of operations. Additionally, Golden Sky's
ability to offer DIRECTV programming services depends upon agreements between
the NRTC and Hughes and between Golden Sky and the NRTC. The NRTC's interests
may differ from Golden Sky's interests. Golden Sky would be materially and
adversely affected by the termination of the NRTC's agreement with Hughes
and/or the termination of Golden Sky's agreements with the NRTC. Golden Sky's
agreements with the NRTC require that it use the NRTC for certain support
services including subscriber information and data reporting capability, retail
billing services and central office subscriber services. Such services are
critical to the operation and management of Golden Sky's business.
On January 10, 2000, Pegasus and Golden Sky filed a lawsuit in federal
court in Los Angeles against DIRECTV (see Note 10). The outcome of this
litigation and similar litigation filed by the NRTC against DIRECTV could have
a material adverse effect on the scope and duration of Golden Sky's right to
provide DIRECTV programming in its Rural DIRECTV Markets, its capital
requirements and its costs of operations.
Competition. The subscription television industry is highly competitive.
Golden Sky faces competition from companies offering video, audio, data,
programming and entertainment services. Many of these competitors have
substantially greater financial and marketing resources than Golden Sky. Golden
Sky's
F-31
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. Organization and Nature of Operations -- (Continued)
ability to effectively compete in the subscription television industry will
depend on a number of factors, including competitive factors (such as the
introduction of new technologies or the entry of additional strong competitors)
and the level of consumer demand for such services.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the financial statements of
Holdings and its majority-owned, direct and indirect subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Minority interest represents the cumulative earnings and losses, after capital
contributions, attributable to minority partners and stockholders.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make a number
of estimates and assumptions which affect the reported amounts of assets and
liabilities, as well as the reported amounts of revenue and expenses during the
period. Actual results could differ from these estimates.
Cash and Cash Equivalents
Golden Sky considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. As of December 31,
1998 and 1999, cash and cash equivalents consisted of cash on hand, demand
deposits and money market accounts.
Restricted Cash
Restricted cash, as reflected in the accompanying consolidated balance
sheets, includes cash restricted by the indenture associated with Systems'
12 3/8% Notes (see Note 5), plus investment earnings thereon. Restricted cash,
which is held in escrow, is invested in certain permitted debt and other
marketable investment securities until disbursed for the express purposes
identified in the indenture. As of December 31, 1998 and 1999, restricted cash
was composed entirely of U.S. treasury notes.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of receivers, satellite dishes and accessories ("DBS Equipment").
Golden Sky subsidizes the cost to the consumer of such equipment, which is
required to receive DIRECTV programming services. Additionally, Golden Sky
subsidizes the cost to the consumer of installation of DBS Equipment. Equipment
and installation revenues and related expenses are recognized upon delivery and
installation of DBS Equipment. Net transaction costs associated with the sale
and installation of DBS Equipment are reported as a component of sales and
marketing expenses in the accompanying consolidated statements of operations.
During the periods ended December 31, 1997, 1998 and 1999, aggregate proceeds
from the sale and installation of DBS Equipment totaled $3.8 million, $11.0
million, and $9.3 million respectively; related cost of sales totaled $4.6
million, $25.8 million, and $44.3 million during those same periods.
Long-lived Assets
Golden Sky reviews its long-lived assets (e.g., property and equipment)
and certain identifiable intangible assets to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. For assets which are held and used in
operations, the
F-32
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
asset would be impaired if the book value of the asset exceeded the
undiscounted future cash flows related to the asset. For those assets that are
to be disposed of, the assets would be impaired to the extent the fair value
does not exceed the book value. Golden Sky considers relevant cash flow,
estimated future operating results, trends and other available information
including the fair value of DIRECTV distribution rights owned, in assessing
whether the carrying value of assets can be recovered.
Property and Equipment
Property and equipment, consisting of computer hardware and software,
furniture, vehicles, and office and other equipment, is recorded at cost.
Depreciation is recognized on a straight-line basis over the related estimated
useful lives, which range from two to five years.
DIRECTV Distribution Rights
DIRECTV distribution rights, which represent the excess of the purchase
price over the fair value of net assets acquired, are amortized on a
straight-line basis over the periods expected to be benefited. The expected
period to be benefited corresponds to the remaining estimated orbital lives of
the satellites used by Hughes for distribution of DIRECTV programming services.
Deferred Financing Costs
Deferred financing costs represent fees and other costs incurred in
conjunction with the issuance of long-term debt. These costs are amortized over
the term of the related debt using the effective interest method. Amortization
of these costs totaled $215,000, $977,000, and $2,164,000 during 1997, 1998 and
1999, respectively.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents: The carrying value approximates fair value as
a result of the short maturity of these instruments.
Receivables and payables: These assets are carried at cost, which
approximates fair value as a result of the short-term nature of the
instruments.
Long-term debt and notes payable: Fair value of Golden Sky's
publicly-traded debt securities is based on quoted market prices. The
carrying value of Golden Sky's bank debt and other notes payable
approximates fair value, as interest rates are variable or approximate
market rates. As of December 31, 1999, the carrying and fair values of
Golden Sky's publicly-traded debt securities were as follows (in
thousands):
Carrying Fair
Value Value
---------- -----------
12 3/8% Notes ................. $195,000 $211,575
13 1/2% Notes ................. 112,095 121,653
Revenue Recognition
DBS services revenue is recognized in the month service is provided.
Unearned revenue represents subscriber advance billings for one or more months;
related revenue recognition is deferred until service is provided.
F-33
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
System Operations Expense
System operations expense includes payroll and other administrative costs
related to Golden Sky's local offices and national call center.
Advertising Costs
Advertising costs are expensed as incurred. Such costs aggregated $1.4
million, $5.1 million, and $5.9 million during the years ended December 31,
1997, 1998 and 1999, respectively.
Free Programming Promotions
Certain DIRECTV national sales promotions offer free programming,
generally for up to three months of service, to new subscribers. The cost of
such free programming is expensed as sales and marketing expense in the period
the services are provided. During 1999, sales and marketing expenses
attributable to such promotions totaled $2.5 million.
Income Taxes
Golden Sky uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. This method
also requires the recognition of future tax benefits, such as net operating
loss carryforwards, to the extent that realization of such benefits is more
likely than not.
Effects of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("FAS No. 133"). As a result of the subsequent issuance of FAS No. 137, FAS No.
133 is now effective for fiscal years beginning after June 15, 2000. FAS No.
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities. Currently, Golden Sky has no derivative instruments
or hedging arrangements. Accordingly, adoption of FAS No. 133 is not expected
to have a material effect on Golden Sky's financial position or results of
operations.
Comprehensive Income
Golden Sky has no components of comprehensive income other than net loss.
3. Acquisitions
Golden Sky accounts for its acquisitions using the purchase method. Golden
Sky's consolidated statements of operations for the periods ended December 31,
1997, 1998 and 1999 include the results of operations of acquired Rural DIRECTV
Markets from the respective acquisition dates.
F-34
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Acquisitions -- (Continued)
The aggregate purchase price (including direct acquisition costs) for the
acquisitions completed during 1997, 1998 and 1999 were allocated as follows
(dollars in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1998 1999
------------ ----------- ----------
<S> <C> <C> <C>
DIRECTV distribution rights ......... $ 116,394 $114,747 $31,809
Customer lists ...................... 9,450 7,114 --
Non-compete agreements .............. 4,879 2,587 4,869
Property and equipment .............. 1,953 204 --
Minority interest ................... (2,931) -- --
Working capital, net ................ (20) 192 100
--------- -------- -------
$ 129,725 $124,844 $36,778
========= ======== =======
</TABLE>
The following summarizes Golden Sky's acquisitions of Rural DIRECTV
Markets consummated during 1997, 1998 and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
Aggregate
Seller Acquisition Date State Consideration
- ------------------------------------------------------ ------------------- -------------------- --------------
<S> <C> <C> <C>
Deep East Texas Telecommunications, Inc .............. February 7, 1997 Texas $ 1,919
Images DBS Kansas, L.C., Images DBS Oklahoma,
L.C. and Total Communications, Inc .................. February 12, 1997 Kansas/Oklahoma 12,702
Direct Satellite TV, LTD ............................. February 28, 1997 Texas 3,746
Thunderbolt Systems, Inc ............................. March 11, 1997 Missouri 6,127
Western Montana DBS, Inc. dba Rocky Mountain
DBS ................................................. May 1, 1997 Colorado 4,774
TEG DBS Services, Inc ................................ June 12, 1997 Nevada 5,237
GVEC Rural TV, Inc ................................... July 8, 1997 Texas 5,176
Satellite Entertainment, Inc ......................... July 14, 1997 Minnesota/Michigan 9,640
Direct Vision ........................................ July 15, 1997 Minnesota 7,452
Argos Support Services Company ....................... August 8, 1997 Florida/Texas/Utah 18,217
JECTV, a segment of Jackson Electric Cooperative ..... August 26, 1997 Texas 9,453
Lakes Area TV ........................................ September 2, 1997 Minnesota 1,355
DCE Satellite Entertainment, LLC ..................... October 13, 1997 Wisconsin 313
Direct Broadcast Satellite, a segment of CTS
Communication Corporation ........................... November 7, 1997 Michigan 4,293
DBS, L.C ............................................. November 17, 1997 Iowa 1,911
Panora Telecommunications, Inc ....................... November 20, 1997 Iowa 1,131
Souris River Television, Inc ......................... November 21, 1997 North Dakota 7,276
Cal-Ore Digital TV, Inc .............................. December 8, 1997 California/Oregon 5,095
NRTC System No. 0093, a segment of Cable and
Communications Corporation .......................... December 17, 1997 Montana 3,876
Western Montana Entertainment Television, Inc. ....... December 22, 1997 Montana 7,067
South Plains DBS ..................................... December 23, 1997 Texas 9,143
Lakeland DBS ......................................... December 24, 1997 Oklahoma 3,822
--------
Total 1997 acquisitions ............................. $129,725
========
</TABLE>
F-35
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Acquisitions -- (Continued)
<TABLE>
<CAPTION>
Aggregate
Seller Acquisition Date State Consideration
- ----------------------------------------------------- -------------------- ----------------- --------------
<S> <C> <C> <C>
Direct Broadcast Satellite, a segment of Nemont
Communications Inc ................................. January 14, 1998 Montana/Wyoming $ 8,284
Triangle Communications System, Inc ................. January 20, 1998 Montana 9,765
Wyoming Mutual Telephone ............................ January 21, 1998 Iowa 527
North Willamette Telephone .......................... March 10, 1998 Oregon 6,015
Northwest Communications ............................ March 10, 1998 North Dakota 1,363
Beulahland Communications, Inc ...................... March 19, 1998 Colorado 835
Direct Broadcast Satellite, a segment of SCS
Communications & Security, Inc ..................... April 20, 1998 Oregon 5,386
PrimeWatch, Inc ..................................... May 8, 1998 North Carolina 7,988
Mega TV ............................................. May 11, 1998 Georgia 2,103
Direct Broadcast Satellite, a division of Baldwin
County Electric Membership Corporation ............. June 29, 1998 Alabama 11,769
Frontier Corporation ................................ July 8, 1998 Wisconsin 734
North Texas Communications .......................... August 6, 1998 Texas 3,118
SEMO Communications Corporation ..................... August 26, 1998 Missouri 2,918
DBS Segment of Cumby Cellular, Inc .................. August 31, 1998 Texas 7,553
Minburn Telephone ................................... September 18, 1998 Iowa 447
Western Montana DBS, Inc. dba Rocky Mountain
DBS ................................................ October 2, 1998 Idaho/Montana 20,740
Direct Broadcast Satellite, a segment of Volcano
Vision, Inc ........................................ October 9, 1998 California 31,425
North Central Missouri Electric Coop ................ November 2, 1998 Missouri 1,745
Star Search Rural Television, Inc ................... November 5, 1998 Oklahoma 2,129
--------
Total 1998 acquisitions ............................ $124,844
========
Breda Telephone Corporation ......................... January 11, 1999 Iowa/Nebraska $ 8,605
Thunderbolt Systems Inc ............................. January 15, 1999 Missouri 2,731
Siskiyou Ruralvision, Inc ........................... February 28, 1999 California 4,735
Baraga Telephone Co ................................. March 31, 1999 Michigan 4,546
E. Ritter Communications ............................ April 2, 1999 Arkansas 2,689
Yelcot Telephone Co ................................. April 2, 1999 Arkansas 6,246
Van Buren DBS ....................................... April 14, 1999 Iowa 2,914
Kertel Communications, Inc .......................... June 24, 1999 California 2,033
Mutual Telephone Company ............................ August 5, 1999 Iowa 620
Dubois Telephone .................................... December 8, 1999 Montana 220
--------
Total 1999 acquisitions ............................ $ 35,339
========
</TABLE>
Golden Sky's 1999 acquisitions of Rural DIRECTV Markets were not material
and, accordingly, the pro forma impact of those acquisitions has not been
presented. Unaudited pro forma total revenue and unaudited pro forma loss
before extraordinary charge for the year ended December 31, 1998 approximated
$87.9 million and $79.8 million, respectively. This unaudited pro forma
information reflects Golden Sky's significant acquisitions of Rural DIRECTV
Markets consummated during 1998 as if each such acquisition had occurred as of
the beginning of 1998. These results are not necessarily indicative of future
operating results or of what would have occurred had the acquisitions been
consummated as of that date.
F-36
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Acquisitions -- (Continued)
During 1997, Golden Sky acquired a controlling interest in DCE Satellite
Entertainment, LLC ("DCE"). In June 1999, Golden Sky acquired the remaining
ownership interest in DCE that it did not hold in exchange for cash of $1.0
million and the issuance of seller notes payable totaling the $2.9 million.
Also during 1999, Golden Sky acquired certain other minority interests for
$496,000.
4. Intangible Assets
Intangible assets, which are amortized using the straight-line method over
the related estimated useful lives, consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------------- Estimated
1998 1999 Useful Life
----------- ----------- ------------
<S> <C> <C> <C>
DIRECTV distribution rights ........... $ 236,531 $ 266,874 9 -12 years
Customer lists ........................ 17,018 18,603 5 years
Non-compete agreements ................ 7,501 12,370 3 years
--------- ---------
261,050 297,847
Less accumulated amortization ......... (27,911) (60,921)
--------- ---------
Intangible assets, net ............. $ 233,139 $ 236,926
========= =========
</TABLE>
5. Long-Term Obligations
Long-term obligations consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
12 3/8% Notes ..................................... $ 195,000 $ 195,000
13 1/2% Notes ..................................... -- 112,095
Bank debt ......................................... 67,000 52,000
Seller notes payable .............................. 15,407 9,823
Other notes payable and obligations under capital
leases ........................................... 797 460
Minority interest ................................. 2,420 936
--------- ---------
Total long-term obligations ....................... 280,624 370,314
Less current maturities ........................... (8,916) (3,248)
--------- ---------
Long-term obligations, net of current maturities $ 271,708 $ 367,066
========= =========
</TABLE>
12 3/8% Notes
On July 31, 1998, Systems consummated an offering (the "12 3/8% Notes
Offering") of 12 3/8% Senior Subordinated Notes due 2006 (the "12 3/8% Notes").
Interest on the 12 3/8% Notes is payable in cash semi-annually in arrears on
February 1 and August 1 of each year, commencing February 1, 1999. The 12 3/8%
Notes mature on August 1, 2006. The 12 3/8% Notes Offering resulted in net
proceeds to Golden Sky of approximately $189.2 million (after payment of
underwriting discounts and other issuance costs aggregating approximately $5.8
million). Approximately $45.2 million of the net proceeds of the 12 3/8% Notes
Offering were placed in escrow to fund the first four semi-annual interest
payments (through August 1, 2000) on the 12 3/8% Notes. Additionally, $5.3
million was reserved to fund a portion of a then contingent reduction of Golden
Sky's availability under its Credit Facility.
The 12 3/8% Notes are unsecured senior subordinated obligations and are
subordinated in right of payment to all existing and future senior indebtedness
of Systems. The 12 3/8% Notes rank pari passu in right of payment with all other
existing and future senior subordinated indebtedness, if any, of Systems and
senior in
F-37
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Long-Term Obligations -- (Continued)
right of payment to all existing and future subordinated indebtedness, if any,
of Systems. The 12 3/8% Notes are guaranteed on a full, unconditional, joint and
several basis by Argos Support Services Company ("Argos") and PrimeWatch, Inc.
("PrimeWatch"). Both Argos and PrimeWatch are wholly-owned subsidiaries of
Golden Sky.
The 12 3/8% Notes are redeemable, in whole or in part, at Systems' option
on or after August 1, 2003, at redemption prices decreasing from 112% during
the year commencing August 1, 2003 to 108% on or after August 1, 2005, plus
accrued and unpaid interest, if any, to the date of redemption. In addition, on
or prior to August 1, 2001, Systems may, at its option, redeem up to 35% of the
originally issued aggregate principal amount of the 12 3/8% Notes, at a
redemption price equal to 112.375% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the date of redemption solely
with the net proceeds of a public equity offering of Systems or Holdings
yielding gross proceeds of at least $40.0 million and any subsequent public
equity offerings (provided that, in the case of any such offering or offerings
by Holdings, all the net proceeds thereof are contributed to Systems);
provided, further that immediately after any such redemption the aggregate
principal amount of Notes outstanding must equal at least 65% of the originally
issued aggregate principal amount of the 12 3/8% Notes.
The indenture related to the 12 3/8% Notes (the "12 3/8% Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
Systems' ability to incur additional indebtedness, pay dividends or make
certain other restricted payments, consummate certain asset sales, enter into
certain transactions with affiliates, incur indebtedness that is subordinate in
right of payment to any senior indebtedness and senior in right of payment to
the 12 3/8% Notes, incur liens, permit restrictions on the ability of
subsidiaries to pay dividends or make certain payments to Systems, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of Systems' assets.
In the event of a change of control, as defined in the 123/8% Notes
Indenture, each holder of 12 3/8% Notes will have the right to require Systems
to purchase all or a portion of such holder's 12 3/8% Notes at a price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase. Golden Sky's merger with Pegasus will constitute a
change of control as defined in the 12 3/8% Notes Indenture. Accordingly, upon
closing of the merger with Pegasus, Golden Sky will be required to make an
offer to the holders of the 12 3/8% Notes to purchase those notes consistent
with the terms described above. If Golden Sky's offer for the 12 3/8% Notes is
accepted by any of its note holders, and it is unable to purchase those notes,
Golden Sky may be in default of the terms of the 12 3/8% Notes Indenture.
Pegasus has entered into a commitment letter with an investment bank under
which that investment bank has agreed to purchase any and all 123/8% Notes
tendered in response to Golden Sky's offer to purchase. This commitment is
subject to the execution of definitive documentation and customary closing
conditions. There can be no assurance that Pegasus will be able to agree on
definitive documentation with the investment bank or make alternative
arrangements if necessary.
The 12 3/8% Notes were issued in a private placement pursuant to Rule 144A
of the Securities Act of 1933, as amended (the "Securities Act"). During 1998,
Systems filed a registration statement with the Securities and Exchange
Commission (the "SEC") relating to the exchange of the privately issued notes
for publicly registered notes with substantially identical terms (including
principal amount, interest rate, maturity, security and ranking). Because the
registration statement was not declared effective within the time period
required under the registration rights agreement associated with the 12 3/8%
Notes Offering, from December 29, 1998 through March 22, 1999 (the date the
registration statement was declared effective), Systems was required to pay
liquidated damages of $18,750 per week to holders of the 12 3/8% Notes.
13 1/2% Notes
On February 19, 1999, Golden Sky DBS consummated the 13 1/2% Notes
Offering, which resulted in net proceeds to Golden Sky DBS of approximately
$95.4 million (after initial purchasers' discount and other
F-38
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Long-Term Obligations -- (Continued)
offering expenses). The 13 1/2% Notes have an aggregate balance due at stated
maturity of $193.1 million. Golden Sky DBS contributed the net proceeds of the
131/2% Notes Offering to Golden Sky Systems, of which $53.0 million was used to
repay existing revolving credit indebtedness. Cash interest on the 13 1/2% Notes
will not accrue prior to March 1, 2004. Thereafter, cash interest will accrue
at a rate of 13 1/2% per annum and be payable in arrears on March 1 and
September 1 of each year, commencing September 1, 2004. The 13 1/2% Notes mature
on March 1, 2007.
The 13 1/2% Notes are unsecured and effectively rank below all of the
liabilities of Golden Sky DBS' direct and indirect subsidiaries. Golden Sky
DBS' ability to pay interest on the notes when interest is due and to redeem
the notes at maturity will depend on whether its direct and indirect
subsidiaries can pay dividends or make other distributions to it under the
terms of such subsidiaries' indebtedness and applicable law.
The 13 1/2% Notes are redeemable, in whole or in part, at the option of
Golden Sky DBS on or after March 1, 2004, at redemption prices decreasing from
106.75% during the year commencing March 1, 2004 to 103.375% on or after March
1, 2005, plus accrued and unpaid interest, if any, to the date of redemption.
In addition, on or prior to March 1, 2002, Golden Sky DBS may, at its option,
redeem up to 35% of the originally issued aggregate principal amount of 13 1/2%
Notes, at a redemption price equal to 113.5% of the accreted value of the
13 1/2% Notes at the date of redemption solely with the net proceeds of a public
equity offering of Golden Sky DBS yielding gross proceeds of at least $40
million and any subsequent public equity offerings; provided, however, that not
less than 65% of the originally issued aggregate principal amount of 131/2%
Notes are outstanding following such redemption.
The indenture governing the 13 1/2% Notes (the "13 1/2% Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
the ability of Golden Sky DBS and its subsidiaries to incur additional
indebtedness; pay dividends on, redeem or repurchase capital stock; make
investments; issue or sell capital stock of certain subsidiaries; create
specific types of liens; sell assets; engage in transactions with affiliates;
and consolidate, merge or transfer all or substantially all of their assets.
In the event of a change of control, as defined in the 13 1/2% Notes
Indenture, each holder of the 13 1/2% Notes will have the right to require
Golden Sky DBS to purchase all or a portion of such holder's 13 1/2% Notes at a
price equal to 101% of the accreted value of the notes, plus accrued and unpaid
interest, if any, to the date of purchase. Golden Sky's merger with Pegasus
will constitute a change of control as defined in the 13 1/2% Notes Indenture.
Accordingly, upon closing of the merger with Pegasus, Golden Sky will be
required to make an offer to the holders of the 13 1/2% Notes to purchase those
notes consistent with the terms described above. If Golden Sky's offer for the
13 1/2% Notes is accepted by any of its note holders, and it is unable to
purchase those notes, Golden Sky may be in default of the terms of the 13 1/2%
Notes Indenture. Pegasus has entered into a commitment letter with an
investment bank under which that investment bank has agreed to purchase any and
all 13 1/2% Notes tendered in response to Golden Sky's offer to purchase. This
commitment is subject to the execution of definitive documentation and
customary closing conditions. There can be no assurance that Pegasus will be
able to agree on definitive documentation with the investment bank or make
alternative arrangements if necessary.
Bank Debt
During 1997, Systems entered into a credit agreement (the "Credit
Agreement") with a group of financial institutions, which provided for
borrowings of $100.0 million. Loans outstanding under the Credit Agreement bore
interest at variable rates (prime rate or LIBOR plus an applicable margin).
During May 1998, Systems entered into a seven-year, $150.0 million amended
credit facility (the "Credit Facility") with a syndicate of lenders. Upon
execution of the Credit Facility, Systems recognized an extraordinary charge of
approximately $2.6 million to write-off unamortized deferred financing costs
F-39
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Long-Term Obligations -- (Continued)
associated with the Credit Agreement. In February 1999, Systems' Credit
Facility was amended to permit, among other things, the 13 1/2% Notes Offering.
Upon execution of the February 1999 amendment to the Credit Facility, Systems
recognized an extraordinary charge of approximately $2.9 million to write off
unamortized deferred financing costs associated with the Credit Facility.
The Credit Facility provides for a term loan commitment of $35.0 million
and a revolving loan commitment of $115.0 million. The Credit Facility's term
loan commitment amortizes in specified quarterly installments from March 31,
2002 through maturity on December 31, 2005. The availability of revolving loan
borrowings under the Credit Facility reduces by specified amounts over the
period from March 31, 2001 through maturity on September 30, 2005.
Borrowings under the Credit Facility bear interest at variable rates
(approximately 10% as of December 31, 1999) calculated on a base rate, such as
the prime rate or LIBOR, plus an applicable margin. Commitment fees are payable
on unused amounts available under the Credit Facility. Such commitment fees,
which are payable quarterly in arrears, range from 0.50% per annum to 1.25% per
annum based on Systems' utilization of such commitments. As of December 31,
1999, aggregate borrowings outstanding under the Credit Facility totaled $52.0
million, including $35.0 million borrowed pursuant to the Credit Facility's
term loan commitment.
The Credit Facility contains a number of restrictive covenants that, among
other things, limit Systems' ability to incur additional indebtedness and
guaranty obligations, create liens and other encumbrances, make certain
payments, investments, loans and advances, pay dividends or make other
distributions in respect of Systems' capital stock, sell or otherwise dispose
of assets, make capital expenditures, merge or consolidate with another entity,
create subsidiaries, make amendments to its organizational documents or
transact with affiliates. As of each of December 31, 1997, 1998 and 1999, no
amounts were available for distribution to Holdings.
The Credit Facility also contains a number of financial covenants that
require Systems to meet certain financial ratios and financial condition tests.
These financial covenants, in certain instances, become effective at different
points in time and vary over time. The covenants include limitations on
indebtedness per subscriber, limitations on subscriber acquisition costs,
maintenance of a minimum fixed charge coverage ratio, maintenance of minimum
interest coverage ratios, and limitations on indebtedness to pro forma EBITDA
(earnings before interest, taxes, depreciation and amortization) ratios.
Revolving credit availability under the Credit Facility depends upon
satisfaction of the various covenants as well as minimum subscriber base
requirements.
As of September 30, 1999, Systems was not in compliance with certain of
the restrictive covenants prescribed by the Credit Facility. During January
2000, the Credit Facility was amended to modify certain fourth quarter 1999 and
year 2000 covenant requirements. Further, in conjunction with the amendment,
Golden Sky's third quarter 1999 covenant violations were waived. Pursuant to
the amendment, which was effective as of December 31, 1999, Golden Sky may
borrow up to an additional $20.0 million under the Credit Facility prior to
March 31, 2000. Any such incremental borrowings, which are secured by letters
of credit provided by certain of Golden Sky Holdings' shareholders, must be
repaid by March 31, 2000 from the proceeds of either a private or public equity
offering. The required repayment date relative to these year 2000 incremental
borrowings may be deferred until May 31, 2000 under certain conditions. Upon
repayment, systems will have potential incremental borrowing capacity during
the year ending December 31, 2000 equal to the lesser of the proceeds received
from either a public or private equity offering or $20.0 million. Coincident
with the amendment of the Credit Facility, Holdings entered into stock
subscription agreements with certain of its shareholders for an aggregate of
$20.0 million of its preferred stock (see note 6). Also in January 2000, the
Credit Facility was further amended to approve the change in ownership of
Holdings that would result from the merger with Pegasus. As of December 31,
1999, Systems was in compliance with the Credit Facility's amended covenants.
F-40
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Long-Term Obligations -- (Continued)
Seller Notes Payable
Seller notes payable bear interest at rates ranging from 7% to 10% and are
collateralized by bank letters of credit.
Other Notes Payable
In November 1996, Golden Sky issued $2.0 million in promissory notes to a
group of lenders under a bridge financing agreement. The notes bore interest at
the rate of 10% per annum. In February 1997, these notes, along with $1.8
million in additional promissory notes issued in January 1997, were exchanged
for Systems' Series A Convertible Participating Preferred Stock. In connection
with the bridge agreement, Systems' issued warrants exercisable for 5,682
shares of its Common Stock at an exercise price of $.01 per share. These
warrants were immediately exercisable and expire on February 12, 2007. At the
date of issuance, the fair value of the warrants was not material. These
warrants were assumed by Holdings after its formation and remain outstanding as
of December 31, 1999.
Future maturities of amounts outstanding under Golden Sky's long-term
obligations as of December 31, 1999 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Seller
12 2/8% 13 1/2% Notes
Notes Notes Bank Debt Payable Other Total
---------- ---------- ----------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Year Ending December 31,
2000 .................. $ -- $ -- $ -- $ 2,891 $357 $ 3,248
2001 .................. -- -- -- 2,970 76 3,046
2002 .................. -- -- 263 2,962 23 3,248
2003 .................. -- -- 350 1,000 4 1,354
2004 .................. -- -- 350 -- -- 350
Thereafter ............ 195,000 112,095 51,037 -- -- 358,132
-------- -------- ------- ------- ---- --------
Total debt .......... $195,000 $112,095 $52,000 $ 9,823 $460 $369,378
======== ======== ======= ======= ==== ========
</TABLE>
6. Mandatorily Redeemable Preferred Stock and Stockholders' Equity (Deficit)
During 1996, Systems issued 1,000 shares of Common Stock, par value $.01,
for aggregate consideration of $1,000 cash. In February 1997, Systems (i)
amended its certificate of incorporation to cancel its outstanding shares of
Common Stock; (ii) created new classes of common and preferred stock and (iii)
exchanged all of the canceled shares of Systems' Common Stock for an aggregate
of ten shares of Systems' Series A Convertible Participating Preferred Stock
(the "Series A Preferred Stock").
In February 1997, Systems issued 24,990 shares of Series A Preferred Stock
in fulfillment of an investor's subscription to purchase Series A Preferred
Stock that was outstanding at December 31, 1996 (aggregate consideration of
$2,499,000). During that same month, Systems issued 100 shares of its Common
Stock (par value $.01) for aggregate consideration of $100 cash and a total of
38,107 shares of Series A Preferred Stock upon the conversion of convertible
promissory notes (plus accrued interest of approximately $62,000) issued in
November 1996 ($2.0 million) and January 1997 ($1.8 million). In February and
March 1997, Systems issued 342,893 additional shares of Series A Preferred
Stock for cash totaling $34.3 million. Upon the formation of Holdings in
September 1997, all shareholders of Systems' Common Stock and Series A
Preferred Stock were issued equivalent shares of Holdings stock. Concurrent
therewith, Systems issued 1,000 shares of its Common Stock (par value $0.01) to
Holdings for cash proceeds of $10 and all previously outstanding shares of
Systems' Common Stock and Series A Preferred Stock were canceled.
F-41
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Mandatorily Redeemable Preferred Stock and Stockholders' Equity (Deficit)
-- (Continued)
At December 31, 1999, Holdings' preferred stock consists of:
Series A Convertible Participating Preferred Stock ("Series A Preferred
Stock")
Holders of Series A Preferred Stock are entitled to voting rights equal
to the largest number of shares of common stock into which the Series A
Preferred Stock can be converted. These shares are entitled to
mandatory, cumulative, compounded cash dividends at the rate of 19.5% of
the liquidation preference through December 31, 1997, and 14.5%
thereafter, payable upon redemption, liquidation, sale of substantially
all of the assets, or certain mergers. In addition the Series A
Preferred Stock shall be entitled to dividends at the same rate as
dividends are paid with respect to the common stock based upon the
largest number of shares of Common Stock into which the Series A
Preferred Stock can be converted. In the event of liquidation, holders
of Series A Preferred Stock are entitled to receive, to the extent
available, the sum of $100 per share plus any unpaid dividends.
The Series A Preferred Stock ranks on par with the Series B Convertible
Participating Preferred Stock, while the Series C Senior Convertible
Preferred Stock ranks senior to the Series A Preferred Stock and Series
B Convertible Participating Preferred Stock for liquidation purposes. In
a liquidation, the Series C Senior Convertible Preferred Stock shall be
entitled to be paid out of assets of Golden Sky available for
distribution to stockholders the sum of $200 per share plus any accrued
and unpaid dividends before any amount shall be paid or distributed to
the holders of the Series A Preferred Stock, Series B Convertible
Participating Preferred Stock, Series A Redeemable Preferred Stock,
Series B Redeemable Preferred Stock, Common Stock or any stock ranking
on liquidation junior to the Series C Senior Convertible Preferred
Stock. After such amounts have been paid to the holders of the Series C
Senior Convertible Preferred Stock, the Series A Preferred Stock,
together with other preferred stockholders ranking junior to the Series
C Senior Convertible Preferred Stock, will, after their respective
liquidation preferences have been satisfied, share ratably with the
holders of common stock in the value received for the remaining assets,
as if each share of Series A Preferred Stock had been converted into
Common Stock.
The Series A Preferred Stock may be converted in certain circumstances
into one share of common stock and 0.95 shares of Series A Redeemable
Preferred Stock, with such redeemable preferred shares each having a
liquidation preference equal to the sum of $100 plus accrued and unpaid
dividends on the redeemable preferred stock. Series A Preferred Stock
will be automatically converted upon the closing of Golden Sky's first
underwritten public offering of common stock with net proceeds to Golden
Sky equal to or exceeding $35 million, where the shares are offered to
the public at a price per share of no less than $300, appropriately
adjusted for any stock split, combination, reorganization,
recapitalization, reclassification, stock distribution, stock dividend,
or similar event, and in which all redeemable preferred stock issuable
upon conversion is redeemed at the closing or sufficient cash to do so
is segregated for that purpose (a "QPO"). Each share of Series A
Preferred is also convertible into common stock and redeemable preferred
stock upon election of 58% of the outstanding shareholders. Any accrued
but unpaid dividends on the Series A Preferred at the time of conversion
will remain deferred and accrued and will be for the benefit of the
shares of the Series A Redeemable Preferred Stock into which the Series
A Preferred Stock was converted. As of December 31, 1999, the
cumulative, unpaid dividends associated with the Series A Preferred
Stock amounted to approximately $23.3 million, or $55.83 per share.
Series A Preferred Stock is mandatorily redeemable for $100 per share,
plus unpaid cumulative dividends, plus the fair value of one share of
Common Stock, upon approval of holders of at least 58% of the
outstanding shares of Series A Preferred Stock on or after February 12,
2002. It is also
F-42
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Mandatorily Redeemable Preferred Stock and Stockholders' Equity (Deficit)
-- (Continued)
redeemable at the option of Golden Sky after December 31, 2002 at the
same redemption price. In the event of a change of management or control
of Golden Sky, and upon election of holders of at least 58% of the
outstanding shares, the Series A Preferred Stock is redeemable on or
after February 12, 2000.
Series B Convertible Participating Preferred Stock ("Series B Preferred
Stock")
The Series B Preferred Stock has features similar to the Series A
Preferred Stock except that mandatory, cumulative, compounded cash
dividends accrue at 14.5% of the liquidation preference, and upon
liquidation, the Series B Preferred Stock shareholders are entitled to a
preference of $200 per share plus any unpaid dividends. Upon conversion,
each share of the Series B Preferred Stock is convertible into one share
of common stock and 0.95 shares of Series B Redeemable Preferred Stock
having a liquidation preference equal to the sum of $200 plus accrued
and unpaid dividends. A QPO with respect to Series B Preferred Stock
requires a price of $600 per share rather than the $300 per share
required with respect to Series A Redeemable Preferred Stock. As of
December 31, 1999, the cumulative unpaid dividends associated with the
Series B Preferred Stock amounted to approximately $16.0 million or
$69.99 per share.
Series C Senior Convertible Preferred Stock ("Series C Preferred Stock")
Holders of the Series C Preferred Stock are entitled to voting rights
equal to the largest number of shares of common stock into which each
share of Series C Preferred Stock can be converted. These shares are
entitled to mandatory, cumulative, compound cash dividends at the rate
of 10.0% of the liquidation preference, payable upon any liquidation
event, sale of substantially all of the assets, certain mergers, or
redemption. In the event of liquidation, holders of Series C Preferred
Stock are entitled to receive, to the extent available, the sum of $200
per share plus any unpaid dividends prior to any distributions to other
stock.
The Series C Preferred Stock will be automatically converted into common
stock upon the closing of Golden Sky's first underwritten public
offering of common stock with net proceeds to Golden Sky equal to or
exceeding $35 million where the shares are offered to the public at a
price per share of no less than $200 per share, appropriately adjusted.
The shares of Series C Preferred Stock are convertible into common stock
upon election of holders of at least 58% of the outstanding shares of
the Series A Preferred Stock and the Series B Preferred Stock, voting
separately by class, to convert all outstanding shares of Series A
Preferred Stock and Series B Preferred Stock into shares of common stock
and redeemable preferred stock. Any holder of Series C Preferred Stock
may also elect to convert any or all of its shares at any time. Upon
conversion, each share of the Series C Preferred Stock is convertible
into one share of Common Stock, and accrued and unpaid dividends are
also converted into common shares based on a $200 per share valuation.
In addition the Series C Preferred Stock of any holder is mandatorily
redeemable for $200 per share plus accrued and unpaid cumulative
dividends upon the written request of such holder on or after September
30, 2003. All the shares of Series C Preferred Stock are redeemable at
the option of Golden Sky after September 30, 2004 at the same redemption
price. As of December 31, 1999, the cumulative unpaid dividends
associated with the Series C Preferred Stock amounted to approximately
$1.3 million, or $26.28 per share.
Series A and Series B Redeemable Preferred Stock
A total of 646,500 shares of Series A and Series B Redeemable Preferred
Stock, $0.01 par value, have been authorized. No shares of Series A or
Series B Redeemable Preferred Stock were issued or outstanding at
December 31, 1999. The Series A and Series B Redeemable Preferred Stock
have the
F-43
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. Mandatorily Redeemable Preferred Stock and Stockholders' Equity (Deficit)
-- (Continued)
same dividend rights as the Series A Preferred Stock and the Series B
Preferred Stock and are redeemable under similar conditions as the
Series A Preferred Stock and Series B Preferred Stock. The Series A and
Series B Redeemable Preferred Stock are also redeemable upon election of
holders of at least 58% of the shares in the series following certain
mergers or sale of substantially all of the assets, and are mandatorily
redeemed as of the closing of a QPO. The redemption price and the
liquidation preference for Series A and Series B Redeemable Preferred
Stock are $100 and $200 per share, respectively, plus accrued and unpaid
dividends. Series A and Series B Redeemable Preferred Stock have no
voting rights, other than rights to elect certain directors and to
approve certain specified corporate actions.
Undesignated Preferred Stock
A total of 300,000 shares of Undesignated Preferred Stock has been
authorized by the Board of Directors. No shares of Undesignated
Preferred Stock, $.01 par value, were issued or outstanding at December
31, 1999. The Board of Directors has the authority to designate the
class of stock, dividend rates, voting powers, redemption options and
conversion options of these shares.
Series D Redeemable Preferred Stock
During January 2000, Holdings entered into a stock purchase agreement for
the sale of up to $20.0 million of its Series D Redeemable Preferred Stock (the
"Series D Preferred Stock") to certain of its shareholders in connection with
an amendment to Systems' Credit Facility. The Series D Preferred Stock will
rank senior to all other series of Golden Sky's preferred and common stock with
respect to dividends and liquidation. Holders of Series D Preferred Stock will
be entitled to 10.0% mandatory, cumulative dividends compounded quarterly.
These dividends are payable in additional shares of Series D Preferred Stock,
which is valued at $200 per share, subject to anti-dilution adjustments. The
Series D Preferred Stock has no voting rights. It has redemption and other
rights similar to Golden Sky's other series of redeemable preferred stock. In
connection with the execution of the stock purchase agreement, Golden Sky
issued warrants to purchase a total of 3,500 shares of its common stock to the
Series D investors. These warrants are immediately exercisable and have an
exercise price of $0.01 per share. Golden Sky will issue additional warrants
for the purchase of 3,500 shares of its common stock upon the sale of the
Series D Preferred Stock and, subject to certain conditions, has agreed to
issue warrants for the purchase of up to an additional 7,000 shares of Common
Stock.
7. Stock Incentive Plan
In July 1997 Systems adopted the Golden Sky Systems, Inc. Stock Option and
Restricted Stock Purchase Plan (the "Stock Incentive Plan") to provide
incentive to attract and retain certain officers, directors and key employees.
Options issued pursuant to the Stock Incentive Plan are exercisable during a
period of up to ten years after grant and vest over a three-year period.
Effective September 9, 1997, Holdings assumed the Stock Incentive Plan.
Participants in the Holdings' Stock Incentive Plan received options with terms
identical to those under Systems' Stock Incentive Plan and all previously
outstanding options were canceled.
F-44
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Stock Incentive Plan -- (Continued)
The following summarizes incentive stock option activity during the
three-year period ended December 31, 1999:
<TABLE>
<CAPTION>
1997 1998 1999
----------------------- -------------------------- ------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ----------- ------------ ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
year .................................... -- $ -- 62,525 $ 1.00 48,745 $ 1.00
Granted .................................. 62,525 1.00 18,693 1.00 11,600 1.00
Exercised ................................ -- -- (24,831) 1.00 (468) 1.00
Forfeited ................................ -- -- (7,642) 1.00 (1,025) 1.00
------ ----- ------- -------- ------ -------
Options outstanding, end of year ......... 62,525 $ 1.00 48,745 $ 1.00 58,852 $ 1.00
====== ====== ======= ======== ====== =======
Options exercisable, end of year ......... 8,684 $ 1.00 5,595 $ 1.00 30,165 $ 1.00
====== ====== ======= ======== ====== =======
</TABLE>
Accounting for Stock-Based Compensation
Golden Sky has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for the Stock Incentive Plan. Under APB 25, if
the exercise price of employee stock options granted pursuant to the Stock
Incentive Plan is equal to or greater than the fair value of the underlying
stock on the date of grant, no compensation expense is recognized. In October
1995, the FASB issued FAS No. 123, "Accounting for Stock-Based Compensation"
("FAS No. 123"), which established an alternative method of expense recognition
for stock-based compensation awards to employees based on fair values. Golden
Sky elected to not adopt FAS No. 123 for expense recognition purposes.
For options granted during 1999, the estimated aggregate fair value of
Golden Sky's Common Stock on the respective grant dates exceeded the related
aggregate exercise price by approximately $462,000. This amount will be
recognized as compensation expense over the vesting period of the related stock
options. Accordingly, compensation cost of $154,000 was recorded during the
year ended December 31, 1999. For options granted in 1998 and 1997, the
exercise prices of the related stock options was not less than the fair value
of Golden Sky's Common Stock as of the respective grant dates and, accordingly,
no compensation expense was recognized relative to those options. The fair
value of Golden Sky's Common Stock was estimated by management using trading
prices for other similar publicly-traded companies, as adjusted for specific
factors and differences deemed relevant to the valuation of Golden Sky's Common
Stock.
Pro forma information regarding net income is required by FAS No. 123 and
has been determined as if Golden Sky had accounted for its stock-based
compensation using the fair value method prescribed by that statement. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the corresponding vesting period. All options are
initially assumed to vest. Compensation previously recognized is reversed to
the extent applicable to forfeitures of unvested options. The fair value of
each option grant was estimated at the date of the grant using a Black-Scholes
option valuation model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1997 1998 1999
---------- ---------- ---------
<S> <C> <C> <C>
Risk-free interest rate .......... 6.0% 6.0% 6.0%
Dividend yield ................... 0.0% 0.0% 0.0%
Volatility factor ................ 0.0% 0.0% 0.0%
Expected term of options ......... 10 years 10 years 10 years
</TABLE>
F-45
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Stock Incentive Plan -- (Continued)
Using the preceding assumptions, there was no pro forma effect on Golden
Sky's net loss from applying the fair value method under FAS No. 123.
8. 401(k) Retirement Plan
Golden Sky sponsors a 401(k) Retirement Plan (the "401(k) Plan") for
eligible employees. Employer matching contributions to the 401(k) Plan, which
became effective as of January 1, 1997, are discretionary. During the years
ended December 31, 1997, 1998 and 1999, Golden Sky made no discretionary
employer matching contributions to the 401(k) Plan. Administrative expenses
associated with the 401(k) Plan during those same periods were not material.
9. Income Taxes
The components of Golden Sky's (provision for) benefit from income taxes
are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Current (provision) benefit:
Federal .................................. $ 3,911 $ 16,325 $ 36,437
State .................................... 742 3,097 6,913
Increase in valuation allowance .......... (4,653) (19,422) (43,350)
-------- --------- ---------
Total current (provision) benefit ......... -- -- --
Deferred benefit:
Federal .................................. 1,639 3,111 3,122
State .................................... 311 590 592
Increase in valuation allowance .......... (1,950) (3,701) (3,714)
-------- --------- ---------
Total deferred benefit .................... -- -- --
-------- --------- ---------
Total benefit (provision) .............. $ -- $ -- $ --
======== ========= =========
</TABLE>
As of December 31, 1999, Golden Sky had net operating loss carryforwards
("NOLs") for federal income tax purposes of approximately $179.0 million. The
NOLs expire beginning in the year 2011. Use of the NOLs is subject to statutory
and regulatory limitations regarding changes in ownership. FAS No. 109,
"Accounting for Income Taxes" ("FAS No. 109"), requires that the potential
future tax benefit of NOLs be recorded as an asset. FAS No. 109 also requires
that deferred tax assets and liabilities be recorded for the estimated future
tax effects of temporary differences between the tax basis and book value of
assets and liabilities. Deferred tax assets are offset by a valuation allowance
if deemed necessary.
In 1999, Holdings increased its valuation allowance sufficient to fully
offset net deferred tax assets arising during the year. Realization of net
deferred tax assets is not assured and is principally dependent on generating
future taxable income prior to expiration of the NOLs. Management frequently
reviews the adequacy of its valuation allowance. Future decreases to the
valuation allowance will be made only as changes in circumstances indicate that
it is more likely than not the additional benefits will be realized. Any future
adjustments to the valuation allowance will be recognized as a separate
component of Holdings' provision for income taxes.
F-46
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. Income Taxes -- (Continued)
The temporary differences that give rise to deferred tax assets and
liabilities as of December 31, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts .............. $ 115 $ 383
Amortization of intangible assets ............ -- --
Accrued expenses ............................. 104 337
--------- ---------
Gross current deferred tax assets ............. 219 720
Valuation allowance ........................... (219) (720)
--------- ---------
Net current deferred tax assets ............... -- --
Non-current deferred tax assets:
Depreciation ................................. 92 139
Amortization of intangible assets ............ 5,931 8,255
Partnerships ................................. -- 841
Net operating loss carryforwards ............. 28,407 71,738
Other ........................................ -- 20
--------- ---------
Total non-current deferred tax assets ......... 34,430 80,993
Valuation allowance ........................... (34,430) (80,993)
--------- ---------
Net non-current deferred tax assets ........... -- --
--------- ---------
Net deferred tax assets ....................... $ -- $ --
========= =========
</TABLE>
The actual income tax benefit (provision) for 1997, 1998 and 1999
reconciles to the amounts computed by applying the statutory federal tax rate
to income before income taxes as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------------
1997 1998 1999
---------------------- ------------------------ ------------------------
Tax Rate Tax Rate Tax Rate
---------- ---------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Statutory rate ..................................... $ 5,391 34.0% $ 21,131 34.0% $ 43,633 34.0%
State income taxes, net of federal benefit ......... 695 4.4 2,433 3.9 4,953 3.9
Non-deductible amortization of intangible
assets ............................................ (291) (1.8) (415) (0.7) (1,507) (1.2)
Other .............................................. (12) (0.1) (26) -- (15) --
Increase in valuation allowance .................... (5,783) (36.5) (23,123) (37.2) (47,064) (36.7)
-------- ----- --------- ----- --------- -----
Income taxes ....................................... $ -- -- % $ -- --% $ -- --%
======== ======== ========= ====== ========= ======
</TABLE>
10. Commitments and Contingencies
DIRECTV Litigation
In May 1999, Hughes acquired United States Satellite Broadcasting Company,
Inc. ("USSB"). Prior to its acquisition by Hughes, USSB offered premium
programming packages consisting of HBO, Showtime, Cinemax and The Movie Channel
to subscribers throughout the United States, including those within the NRTC's
rural DIRECTV markets. After completing its acquisition of USSB, Hughes
combined its DIRECTV business with USSB's assets to expand its programming
lineup through the addition of HBO, Showtime, Cinemax and The Movie Channel.
F-47
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Commitments and Contingencies -- (Continued)
On June 3, 1999, the NRTC filed suit against DIRECTV and Hughes alleging
breach of contract and seeking a court order requiring DIRECTV to provide NRTC
members and affiliates with HBO, Showtime, Cinemax and The Movie Channel
programming for exclusive distribution in the NRTC's rural DIRECTV markets and
a temporary restraining order and preliminary injunction preventing DIRECTV
from providing, marketing, selling or billing for this programming in the
NRTC's rural markets. On June 17, 1999, the court denied the NRTC's request for
a temporary restraining order and preliminary injunction. On July 12, 1999, the
NRTC amended its complaint to add a second claim for breach of contract and to
seek a declaratory judgment that, if the court determines that the NRTC does
not have the exclusive right to provide HBO, Showtime, Cinemax and The Movie
Channel programming in its rural markets, then the NRTC has the non-exclusive
right to distribute this programming in its rural markets. In July 1999,
DIRECTV and Hughes filed a motion to dismiss this portion of the NRTC's
complaint on the grounds that it fails to state a claim upon which relief may
be granted because DIRECTV is in the process of negotiating USSB programming
distribution rights with the NRTC and the DBS Distribution Agreement requires
the parties to arbitrate any claims regarding the terms and conditions of these
rights. The Court denied the motion to dismiss on September 8, 1999.
In July 1999, DIRECTV and Hughes filed a counterclaim against the NRTC. In
the counterclaim, DIRECTV seeks the following declaratory judgments:
1. That DBS-1, the first satellite launched by Hughes, is the only relevant
satellite for determining the term of the DBS Distribution Agreement; and
2. That the DIRECTV-1R satellite, which was launched in October 1999, is a
successor satellite to DBS-1 within the scope and meaning of the DBS
Distribution Agreement; that DIRECTV appropriately and prudently exercised
its discretion, including its sole discretion to determine when and under
what conditions a successor satellite should be launched, in determining
to launch DIRECTV-1R in order to prevent a disruption in service; that the
NRTC's right of first refusal under the DBS Distribution Agreement will be
based on the satellite expiration date of DBS-1; and that pursuant to its
right of first refusal, the NRTC has no right to specified programming
services currently required to be provided under the DBS Distribution
Agreement or more than 20 program channels of transponder capacity.
On August 26, 1999, the NRTC filed a separate lawsuit against DIRECTV and
Hughes in the United States District Court for the Central District of
California. In this suit, the NRTC alleges that DIRECTV and Hughes have
breached their fiduciary duty to the NRTC as well as the NRTC's agreement with
Hughes and have engaged in unfair business practices in violation of California
law by withholding from the NRTC various revenues, cost savings, discounts and
other benefits belonging to the NRTC under its agreement with Hughes. On
October 15, 1999 DIRECTV moved to have the NRTC's breach of fiduciary duty (and
related breach of confidential relationship claims) dismissed. The court
granted DIRECTV's motion on November 15, 1999.
A trial date has not been set on the merits of any of the claims made by
the NRTC or DIRECTV and Hughes in either lawsuit. We are unable to predict the
outcome of these matters or how they will impact the business relationship
between the NRTC and DIRECTV.
On January 10, 2000, Golden Sky and Pegasus filed a lawsuit against
DIRECTV and Hughes in the United States District Court, Central District of
California. The action asserts various claims, including intentional
interference with contractual relations and interference with prospective
economic advantage, and seeks declaratory relief. The claims are based on
DIRECTV's failure to provide NRTC with certain premium programming, thereby
preventing NRTC from providing said premium programming to the class action
members. The claims are also based on DIRECTV's position with respect to launch
fees and other benefits it has received, contract term and rights of refusal.
We are unable to predict the outcome of this matter or how it will impact our
business, financial condition or results of operations.
F-48
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Commitments and Contingencies -- (Continued)
Other Litigation
Golden Sky is subject to various other legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect Golden Sky's financial position or results of operations.
Operating Leases
Golden Sky has non-cancelable operating leases for office, warehouse and
storage space and equipment that expire at various dates. Future minimum lease
payments as of December 31, 1999 are summarized as follows (dollars in
thousands):
2000 ................................. $2,116
2001 ................................. 1,611
2002 ................................. 1,050
2003 ................................. 255
2004 and thereafter .................. 79
------
Total ................................ $5,111
======
11. Related Party Transactions
In 1997, Systems paid $66,000 to a company affiliated with Systems'
president for consulting services received by Systems. Additionally, during
1997, 1998 and 1999 Systems paid $77,000, $159,000 (including $75,000 paid in
connection with a 1998 acquisition) and $84,000, respectively, to one of its
directors for consulting services.
During 1996, Golden Sky's president provided Systems with a short-term
loan in the amount of $381,000. In 1997, Golden Sky received an additional
$150,000 short-term loan from its president and a $215,000 short-term loan from
a shareholder. Each of these loans bore interest at an annual rate of 10% and
was repaid during 1997.
Through December 31, 1999, Golden Sky contracted with an entity owned by
its president for air transportation services, including the lease of an
aircraft. This lease, which was canceled effective December 31, 1999, required
monthly payments equal to the greater of $20,000 or an aggregate fixed hourly
operating charge. The fixed hourly operating charge was based on prevailing
market prices. The total cost of such services approximated $109,000, $506,000
and $300,000 during 1997, 1998 and 1999, respectively.
12. Valuation and Qualifying Accounts
Golden Sky's valuation and qualifying accounts as of December 31, 1997,
1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Allowance for doubtful accounts, beginning of period ......... $ 4 $ 138 $ 293
Charged to costs and expenses ................................ 417 1,537 3,909
Deductions ................................................... (283) (1,382) (3,229)
------ -------- --------
Allowance for doubtful accounts, end of period ............... $ 138 $ 293 $ 973
====== ======== ========
</TABLE>
F-49
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors
Consolidating financial information for Golden Sky, Golden Sky's guarantor
subsidiaries, and Golden Sky's non-guarantor subsidiaries is as follows
(dollars in thousands):
Consolidating Statement of Operations -- Year Ended December 31, 1997
<TABLE>
<CAPTION>
Consolidating
Non- and
Guarantor guarantor Eliminating
Holdings Systems Subsidiaries Subsidiaries Adjustments Consolidated
---------- ------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
DBS services ...................... $ -- $ 13,356 $ 2,787 $ 309 $ -- $ 16,452
Lease and other ................... -- 931 -- 13 -- 944
----- --------- ------- ------ ------ ---------
Total revenue ...................... -- 14,287 2,787 322 -- 17,396
Costs and Expenses:
Costs of DBS services ............. -- 7,514 1,601 189 -- 9,304
System operations ................. -- 2,830 876 100 (10) 3,796
Sales and marketing ............... -- 6,597 693 26 -- 7,316
General and administrative ........ -- 2,260 59 12 -- 2,331
Depreciation and amortization ..... -- 6,312 109 79 800 7,300
----- --------- ------- ------ ------ ---------
Total costs and expenses ........... -- 25,513 3,338 406 790 30,047
----- --------- ------- ------ ------ ---------
Operating loss ..................... -- (11,226) (551) (84) (790) (12,651)
Non-operating items:
Interest and investment income..... -- 30 10 -- -- 40
Interest expense .................. (73) (3,170) (3) -- -- (3,246)
----- --------- --------- ------ ------ ---------
Total non-operating items .......... (73) (3,140) 7 -- -- (3,206)
----- --------- -------- ------ ------ ---------
Loss before income taxes ........... (73) (14,366) (544) (84) (790) (15,857)
Income taxes ....................... -- -- -- -- -- --
----- --------- -------- ------ ------ ---------
Net loss ........................... $ (73) $ (14,366) $ (544) $ (84) $ (790) $ (15,857)
===== ========= ======== ====== ====== =========
</TABLE>
F-50
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors
-- (Continued)
Consolidating Statement of Cash Flows -- Year Ended December 31, 1997
<TABLE>
<CAPTION>
Guarantor
Holdings Systems Subsidiaries
------------ ------------- --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss .................................... $ (73) $ (14,366) $ (544)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization .............. -- 6,312 109
Amortization of debt discount, deferred
financing costs and other ................ -- 215 --
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of unearned
revenue ................................. -- (1,827) (615)
Other receivables ........................ (586) (185) 24
Inventory ................................ -- (1,499) (34)
Prepaid expenses and other ............... -- (201) 8
Trade accounts payable ................... -- 7,683 (320)
Interest payable ......................... 73 733 --
Accrued payroll and other ................ 574 (1,461) 2,460
---------- ---------- ------
Net cash provided by (used in) operating
activities ............................... (12) (4,596) 1,088
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets....... -- (120,051) --
Purchases of property and equipment ........ -- (992) (6)
Other ...................................... -- 320 --
---------- ---------- --------
Net cash provided by (used in) investing
activities ............................... -- (120,723) (6)
Cash Flows From Financing Activities
Proceeds from issuance of Series A
Preferred Stock .......................... 1,200 34,289 --
Proceeds from bridge loan .................. 10,000 -- --
Proceeds from issuance of Series B
Preferred Stock .......................... 35,616 -- --
Borrowings under the Credit Agreement ...... -- 75,000 --
Principal payments on the Credit
Agreement ................................ -- (14,995) (5)
Proceeds from issuance of notes payable .... -- 2,115 __
Principal payments on notes payable and
obligations under capital leases ......... -- (2,902) --
Contribution from Holdings ................. (46,800) 46,800 --
Increase in deferred financing costs ....... -- (3,321) --
---------- ---------- --------
Net cash provided by (used in) financing
activities ............................... 16 136,986 (5)
Net increase in cash and cash equivalents... 4 11,667 1,077
Cash and cash equivalents, beginning of
period ................................... -- 479 --
---------- ---------- --------
Cash and cash equivalents, end of period ... $ 4 $ 12,146 $ 1,077
========== ========== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidating
Non- and
guarantor Eliminating
Subsidiaries Adjustments Consolidated
-------------- -------------- -------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss .................................... $ (84) $ (790) $ (15,857)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization .............. 79 800 7,300
Amortization of debt discount, deferred
financing costs and other ................ -- -- 215
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of unearned
revenue ................................. (59) -- (2,501)
Other receivables ........................ -- 586 (161)
Inventory ................................ (71) -- (1,604)
Prepaid expenses and other ............... (10) -- (203)
Trade accounts payable ................... 152 -- 7,515
Interest payable ......................... -- -- 806
Accrued payroll and other ................ 402 (596) 1,379
----- ------ ----------
Net cash provided by (used in) operating
activities ............................... 409 -- (3,111)
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets....... -- -- (120,051)
Purchases of property and equipment ........ -- -- (998)
Other ...................................... -- -- 320
----- ------ ----------
Net cash provided by (used in) investing
activities ............................... -- -- (120,729)
Cash Flows From Financing Activities
Proceeds from issuance of Series A
Preferred Stock .......................... -- -- 35,489
Proceeds from bridge loan .................. -- -- 10,000
Proceeds from issuance of Series B
Preferred Stock .......................... -- -- 35,616
Borrowings under the Credit Agreement ...... -- -- 75,000
Principal payments on the Credit
Agreement ................................ -- -- (15,000)
Proceeds from issuance of notes payable .... -- -- 2,115
Principal payments on notes payable and
obligations under capital leases ......... -- -- (2,902)
Contribution from Holdings ................. -- -- --
Increase in deferred financing costs ....... -- -- (3,321)
----- ------ ----------
Net cash provided by (used in) financing
activities ............................... -- -- 136,997
Net increase in cash and cash equivalents... 409 -- 13,157
Cash and cash equivalents, beginning of
period ................................... -- -- 479
----- ------ ----------
Cash and cash equivalents, end of period ... $ 409 $ -- $ 13,636
===== ====== ==========
</TABLE>
F-51
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors
-- (Continued)
Consolidating Balance Sheet -- December 31, 1998
<TABLE>
<CAPTION>
Guarantor
Holdings Systems Subsidiaries
------------- ----------- --------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents .................. $ 28 $ 827 $ 1,189
Restricted cash, current portion ........... -- 28,083 --
Subscriber receivables, net ................ -- 6,815 1,043
Other receivables .......................... -- 2,360 87
Intercompany receivables ................... 12 11,521 --
Inventory .................................. -- 9,255 583
Prepaid expenses and other ................. -- 1,819 37
----------- --------- -------
Total current assets ........................ 40 60,680 2,939
Restricted cash, net of current portion ..... -- 23,534 --
Property and equipment, net ................. -- 4,418 381
Investment in subsidiaries .................. 15,922 22,518 --
Intangible assets, net ...................... -- 199,867 25,051
Deferred financing costs .................... -- 10,541 --
Other assets ................................ -- 133 85
----------- --------- -------
Total assets ............................. $ 15,962 $ 321,691 $28,456
=========== ========= =======
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Trade accounts payable ..................... $ -- $ 13,482 $ 49
Interest payable ........................... -- 11,009 --
Current maturities of long-term
obligations ............................... -- 8,916 --
Unearned revenue ........................... -- 4,380 789
Accrued payroll and other .................. -- 1,028 6,263
----------- --------- -------
Total current liabilities ................... -- 38,815 7,101
Long-term obligations, net of current
maturities:
12 3/8% Notes .............................. -- 195,000 --
Bank debt .................................. -- 67,000 --
Seller notes payable ....................... -- 6,912 --
Other notes payable and obligations
under capital leases ...................... -- 318 58
Minority interest .......................... -- -- --
----------- --------- -------
Total long-term obligations, net of current
maturities ................................. -- 269,230 58
----------- --------- -------
Total liabilities ........................... -- 308,045 7,159
Mandatorily redeemable preferred stock:
Series A Preferred Stock ................... 56,488 -- --
Series B Preferred stock ................... 53,489 -- --
Series C Preferred Stock ................... 10,455 -- --
----------- --------- -------
120,432 -- --
Stockholders' Equity (Deficit):
Common Stock ............................... -- -- 896
Additional paid-in capital ................. 25 97,600 1,967
Retained earnings (accumulated deficit) .... (104,495) (83,954) 18,434
----------- --------- -------
Total stockholders' equity (deficit) ........ (104,470) 13,646 21,297
----------- --------- -------
Total liabilities and stockholders'
equity (deficit) ....................... $ 15,962 $ 321,691 $28,456
=========== ========= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidating
Non- and
guarantor Eliminating
Subsidiaries Adjustments Consolidated
-------------- -------------- -------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents .................. $2,444 $ -- $ 4,488
Restricted cash, current portion ........... -- -- 28,083
Subscriber receivables, net ................ 774 -- 8,632
Other receivables .......................... 18 -- 2,465
Intercompany receivables ................... -- (11,533) --
Inventory .................................. 308 -- 10,146
Prepaid expenses and other ................. 3 -- 1,859
------ --------- ----------
Total current assets ........................ 3,547 (11,533) 55,673
Restricted cash, net of current portion ..... -- -- 23,534
Property and equipment, net ................. 195 -- 4,994
Investment in subsidiaries .................. -- (38,440) --
Intangible assets, net ...................... 3,525 4,696 233,139
Deferred financing costs .................... -- -- 10,541
Other assets ................................ -- -- 218
------ --------- ----------
Total assets ............................. $7,267 $ (45,277) $ 328,099
====== ========= ==========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Trade accounts payable ..................... $ 8 $ -- $ 13,539
Interest payable ........................... -- -- 11,009
Current maturities of long-term
obligations ............................... -- -- 8,916
Unearned revenue ........................... 405 -- 5,574
Accrued payroll and other .................. 5,633 (11,533) 1,391
------ --------- ----------
Total current liabilities ................... 6,046 (11,533) 40,429
Long-term obligations, net of current
maturities:
12 3/8% Notes .............................. -- -- 195,000
Bank debt .................................. -- -- 67,000
Seller notes payable ....................... -- -- 6,912
Other notes payable and obligations
under capital leases ...................... -- -- 376
Minority interest .......................... -- 2,420 2,420
------ --------- ----------
Total long-term obligations, net of current
maturities ................................. -- 2,420 271,708
------ --------- ----------
Total liabilities ........................... 6,046 (9,113) 312,137
Mandatorily redeemable preferred stock:
Series A Preferred Stock ................... -- -- 56,488
Series B Preferred stock ................... -- -- 53,489
Series C Preferred Stock ................... -- -- 10,455
------ --------- ----------
-- -- 120,432
Stockholders' Equity (Deficit):
Common Stock ............................... -- (896) --
Additional paid-in capital ................. -- (99,567) 25
Retained earnings (accumulated deficit) .... 1,221 64,299 (104,495)
------ --------- ----------
Total stockholders' equity (deficit) ........ 1,221 (36,164) (104,470)
------ --------- ----------
Total liabilities and stockholders'
equity (deficit) ....................... $7,267 $ (45,277) $ 328,099
====== ========= ==========
</TABLE>
F-52
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors
-- (Continued)
Consolidating Statement of Operations - Year Ended December 31, 1998
<TABLE>
<CAPTION>
Guarantor
Holdings Systems Subsidiaries
---------- ------------ --------------
<S> <C> <C> <C>
Revenue:
DBS services ........................... $-- $ 57,437 $ 11,172
Lease and other ........................ -- 982 22
---- --------- --------
Total revenue ........................... -- 58,419 11,194
Costs and Expenses:
Costs of DBS services .................. -- 34,640 6,813
System operations ...................... -- 7,683 2,533
Sales and marketing .................... -- 23,753 5,045
General and administrative ............. -- 7,000 267
Depreciation and amortization .......... -- 19,336 996
---- --------- --------
Total costs and expenses ................ -- 92,412 15,654
---- --------- --------
Operating loss .......................... -- (33,993) (4,460)
Non-operating items:
Interest and investment income ......... -- 1,571 2
Interest expense ....................... (1) (20,497) (28)
------ --------- --------
Total non-operating items ............... (1) (18,926) (26)
------ --------- --------
Loss before income taxes ................ (1) (52,919) (4,486)
Income taxes ............................ -- -- --
----- --------- --------
Loss before extraordinary charge ........ (1) (52,919) (4,486)
Extraordinary charge on early retire-
ment of debt ........................... -- (2,577) --
----- --------- --------
Net loss ................................ $(1) $ (55,496) $ (4,486)
===== ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidating
Non- and
guarantor Eliminating
Subsidiaries Adjustments Consolidated
-------------- -------------- -------------
<S> <C> <C> <C>
Revenue:
DBS services ........................... $ 6,301 $ -- $ 74,910
Lease and other ........................ 10 -- 1,014
-------- -------- ---------
Total revenue ........................... 6,311 -- 75,924
Costs and Expenses:
Costs of DBS services .................. 3,838 -- 45,291
System operations ...................... 1,318 (513) 11,021
Sales and marketing .................... 3,403 -- 32,201
General and administrative ............. 164 -- 7,431
Depreciation and amortization .......... 340 2,494 23,166
-------- -------- ---------
Total costs and expenses ................ 9,063 1,981 119,110
-------- -------- ---------
Operating loss .......................... (2,752) (1,981) (43,186)
Non-operating items:
Interest and investment income ......... -- -- 1,573
Interest expense ....................... (12) -- (20,538)
-------- -------- ---------
Total non-operating items ............... (12) -- (18,965)
-------- -------- ---------
Loss before income taxes ................ (2,764) (1,981) (62,151)
Income taxes ............................ -- -- --
-------- -------- ---------
Loss before extraordinary charge ........ (2,764) (1,981) (62,151)
Extraordinary charge on early retire-
ment of debt ........................... -- -- 2,577
-------- -------- ---------
Net loss ................................ $ (2,764) $ (1,981) $ (64,728)
======== ======== =========
</TABLE>
F-53
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors
-- (Continued)
Consolidating Statement of Cash Flows - Year Ended December 31, 1998
<TABLE>
<CAPTION>
Guarantor
Holdings Systems Subsidiaries
---------- ------------- --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss .................................... $ (1) $ (55,496) $ (4,486)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization .............. -- 19,336 996
Amortization of debt discount, deferred
financing and other ...................... -- 977 --
Extraordinary charge on early
retirement of debt ....................... -- 2,577 --
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of
unearned revenue ........................ -- (1,283) (222)
Other receivables ........................ 574 (2,144) 32
Inventory ................................ -- (7,335) (477)
Prepaid expenses and other ............... -- (1,189) (36)
Trade accounts payable ................... -- 5,357 (145)
Interest payable ......................... -- 10,223 --
Accrued payroll and other ................ (574) (10,253) 4,827
------ ---------- --------
Net cash provided by (used in) operating
activities ................................. (1) (39,230) 489
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets........ -- (104,487) --
Offering proceeds and investment earn-
ings placed in escrow ...................... -- (51,617) --
Purchases of property and equipment ......... -- (2,858) (341)
Other ....................................... -- (500) --
-------- ---------- --------
Net cash used in investing activities ....... -- (159,462) (341)
Cash Flows From Financing Activities
Net proceeds from issuance of 12 3/8%
Notes ...................................... -- 189,150 --
Borrowings under bank debt .................. -- 90,000 --
Principal payments on bank debt ............. -- (83,000) --
Principal payments on notes payable and
obligations under capital leases ........... -- (3,639) (36)
Proceeds from the issuance of Common
Stock ...................................... 25 -- --
Increase in deferred financing costs ........ -- (5,138) --
-------- ---------- --------
Net cash provided by (used in) financing
activities ................................. 25 187,373 (36)
-------- ---------- --------
Net increase (decrease) in cash and cash
equivalents ................................ 24 (11,319) 112
Cash and cash equivalents, beginning of
period ..................................... 4 12,146 1,077
-------- ---------- --------
Cash and cash equivalents, end of period..... $ 28 $ 827 $ 1,189
======== ========== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidating
Non- and
guarantor Eliminating
Subsidiaries Adjustments Consolidated
-------------- -------------- -------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss .................................... $(2,764) $ (1,981) $ (64,728)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization .............. 340 2,494 23,166
Amortization of debt discount, deferred
financing and other ...................... -- -- 977
Extraordinary charge on early
retirement of debt ....................... -- -- 2,577
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of
unearned revenue ........................ (252) -- (1,757)
Other receivables ........................ (18) (12) (1,568)
Inventory ................................ (237) -- (8,049)
Prepaid expenses and other ............... (3) -- (1,228)
Trade accounts payable ................... (144) -- 5,068
Interest payable ......................... -- -- 10,223
Accrued payroll and other ................ 5,231 (501) (1,270)
--------- -------- ----------
Net cash provided by (used in) operating
activities ................................. 2,153 -- (36,589)
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets........ -- -- (104,487)
Offering proceeds and investment earn-
ings placed in escrow ...................... -- -- (51,617)
Purchases of property and equipment ......... (118) -- (3,317)
Other ....................................... -- -- (500)
--------- -------- ----------
Net cash used in investing activities ....... (118) -- (159,921)
Cash Flows From Financing Activities
Net proceeds from issuance of 12 3/8%
Notes ...................................... -- -- 189,150
Borrowings under bank debt .................. -- -- 90,000
Principal payments on bank debt ............. -- -- (83,000)
Principal payments on notes payable and
obligations under capital leases ........... -- -- (3,675)
Proceeds from the issuance of Common
Stock ...................................... -- -- 25
Increase in deferred financing costs ........ -- -- (5,138)
--------- -------- ----------
Net cash provided by (used in) financing
activities ................................. -- -- 187,362
--------- -------- ----------
Net increase (decrease) in cash and cash
equivalents ................................ 2,035 -- (9,148)
Cash and cash equivalents, beginning of
period ..................................... 409 -- 13,636
--------- -------- ----------
Cash and cash equivalents, end of period..... $ 2,444 $ -- $ 4,488
========= ======== ==========
</TABLE>
F-54
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors
-- (Continued)
Consolidating Balance Sheet -- December 31, 1999
<TABLE>
<CAPTION>
Holdings DBS Systems
------------- ------------- -------------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................... $ 29 $ 5 $ 2,850
Restricted cash, current portion ............ -- -- 23,731
Subscriber receivables, net ................. -- -- 10,118
Other receivables ........................... -- -- 742
Intercompany receivables .................... 10 -- 6,412
Inventory ................................... -- -- 2,525
Prepaid expenses and other .................. -- -- 1,642
----------- ----------- ----------
Total current assets ......................... 39 5 48,020
Property and equipment, net .................. -- -- 5,459
Investment in subsidiaries ................... -- -- 17,144
Intangible assets, net ....................... -- -- 213,229
Deferred financing costs ..................... -- 4,144 7,318
Other assets ................................. -- -- 173
----------- ----------- ----------
Total assets .............................. $ 39 $ 4,149 $ 291,343
=========== =========== ==========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Trade accounts payable ...................... $ -- $ -- $ 22,858
Interest payable ............................ -- 20 11,659
Current maturities of long-term
obligations ............................... -- -- 3,248
Unearned revenue ............................ -- -- 7,146
Accrued payroll and other ................... 391 466 734
----------- ----------- ----------
Total current liabilities .................... 391 486 45,645
Long-term obligations, net of current
maturities:
12 3/8% Notes ............................... -- -- 195,000
13 1/2% Notes ............................... -- 112,095 --
Bank debt ................................... -- -- 52,000
Seller notes payable ........................ -- -- 6,932
Other notes payable and obligations
under capital leases ...................... -- -- 103
Minority interest ........................... -- -- --
----------- ----------- ----------
Total long-term obligations, net of current
maturities .................................. -- 112,095 254,035
Losses of subsidiaries in excess of
original basis .............................. 114,799 15,491 --
----------- ----------- ----------
Total liabilities ............................ 115,190 128,072 299,680
Mandatorily redeemable preferred stock:
Series A Preferred Stock .................... 65,135 -- --
Series B Preferred stock .................... 61,677 -- --
Series C Preferred Stock .................... 11,540 -- --
----------- ----------- ----------
138,352 -- --
Stockholder's Equity (Deficit):
Common Stock ................................ -- -- --
Additional paid-in capital .................. 179 -- 193,145
Retained earnings (accumulated
deficit) .................................. (253,682) (123,923) (201,482)
----------- ----------- ----------
Total stockholders' equity (deficit) ......... (253,503) (123,923) (8,337)
----------- ----------- ----------
Total liabilities and stockholders'
equity (deficit) ......................... $ 39 $ 4,149 $ 291,343
=========== =========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidating
Non- and
Guarantor guarantor Eliminating
Subsidiaries Subsidiaries Adjustments Consolidated
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................... $ 132 $ 254 $ -- $ 3,270
Restricted cash, current portion ............ -- -- -- 23,731
Subscriber receivables, net ................. 1,445 770 -- 12,333
Other receivables ........................... -- -- -- 742
Intercompany receivables .................... -- -- (6,422) --
Inventory ................................... 331 252 -- 3,108
Prepaid expenses and other .................. 8 2 -- 1,652
------- ------ ---------- ----------
Total current assets ......................... 1,916 1,278 (6,422) 44,836
Property and equipment, net .................. 256 138 -- 5,853
Investment in subsidiaries ................... -- -- (17,144) --
Intangible assets, net ....................... 22,930 767 -- 236,926
Deferred financing costs ..................... -- -- -- 11,462
Other assets ................................. 87 -- -- 260
------- ------ ---------- ----------
Total assets .............................. $25,189 $2,183 $ (23,566) $ 299,337
======= ====== ========== ==========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Trade accounts payable ...................... $ 18 $ 17 $ -- $ 22,893
Interest payable ............................ -- -- -- 11,679
Current maturities of long-term
obligations ............................... -- -- -- 3,248
Unearned revenue ............................ 1,065 458 -- 8,669
Accrued payroll and other ................... 7,032 1,638 (9,328) 933
------- ------ ---------- ----------
Total current liabilities .................... 8,115 2,113 (9,328) 47,422
Long-term obligations, net of current
maturities:
12 3/8% Notes ............................... -- -- -- 195,000
13 1/2% Notes ............................... -- -- -- 112,095
Bank debt ................................... -- -- -- 52,000
Seller notes payable ........................ -- -- -- 6,932
Other notes payable and obligations
under capital leases ...................... -- -- -- 103
Minority interest ........................... -- -- 936 936
------- ------ ---------- ----------
Total long-term obligations, net of current
maturities .................................. -- -- 936 367,066
Losses of subsidiaries in excess of
original basis .............................. -- -- (130,290) --
------- ------ ---------- ----------
Total liabilities ............................ 8,115 2,113 (138,682) 414,488
Mandatorily redeemable preferred stock:
Series A Preferred Stock .................... -- -- -- 65,135
Series B Preferred stock .................... -- -- -- 61,677
Series C Preferred Stock .................... -- -- -- 11,540
------- ------ ---------- ----------
-- -- -- 138,352
Stockholder's Equity (Deficit):
Common Stock ................................ 896 -- (896) --
Additional paid-in capital .................. 1,967 -- (195,112) 179
Retained earnings (accumulated
deficit) .................................. 14,211 70 311,124 (253,682)
------- ------ ---------- ----------
Total stockholders' equity (deficit) ......... 17,074 70 115,116 (253,503)
------- ------ ---------- ----------
Total liabilities and stockholders'
equity (deficit) ......................... $25,189 $2,183 $ (23,566) $ 299,337
======= ====== ========== ==========
</TABLE>
F-55
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors
-- (Continued)
Consolidating Statement of Operations - Year Ended December 31, 1999
<TABLE>
<CAPTION>
Holdings DBS Systems
---------- -------------- -------------
<S> <C> <C> <C>
Revenue:
DBS services ........................ $ -- $ -- $ 112,714
Lease and other ..................... -- -- 636
------ -------- ----------
Total revenue ........................ -- -- 113,350
Costs and Expenses:
Costs of DBS services ............... -- -- 71,510
System operations ................... -- -- 14,349
Sales and marketing ................. -- -- 58,452
General and administrative .......... -- 5 15,703
Depreciation and amortization ....... -- -- 32,562
------ -------- ----------
Total costs and expenses ............. -- 5 192,576
------ -------- ----------
Operating income (loss) .............. -- (5) (79,226)
Non-operating items:
Interest and investment income....... 1 -- 2,392
Interest expense .................... -- (12,570) (32,435)
Other non-operating expenses ........ (391) (466) (258)
------ -------- ----------
Total non-operating items ............ (390) (13,036) (30,301)
------ -------- ----------
Income (loss) before income taxes..... (390) (13,041) (109,527)
Income taxes ......................... -- -- --
------ -------- ----------
Income (loss) before extraordinary
charge .............................. (390) (13,041) (109,527)
Extraordinary charge on early
retirement of debt .................. -- -- (2,935)
------ -------- ----------
Net income (loss) .................... $ (390) $(13,041) $ (112,462)
====== ======== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidating
Non- and
Guarantor guarantor Eliminating
Subsidiaries Subsidiaries Adjustments Consolidated
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenue:
DBS services ........................ $18,130 $ 9,089 $ -- $ 139,933
Lease and other ..................... 3 1 -- 640
------- ------- ------- ----------
Total revenue ........................ 18,133 9,090 -- 140,573
Costs and Expenses:
Costs of DBS services ............... 11,516 5,664 -- 88,690
System operations ................... 3,495 2,155 (266) 19,733
Sales and marketing ................. 4,142 2,339 -- 64,933
General and administrative .......... -- -- -- 15,708
Depreciation and amortization ....... 3,054 347 -- 35,963
------- ------- ------- ----------
Total costs and expenses ............. 22,207 10,505 (266) 225,027
------- ------- ------- ----------
Operating income (loss) .............. (4,074) (1,415) 266 (84,454)
Non-operating items:
Interest and investment income....... -- -- -- 2,393
Interest expense .................... (5) (2) -- (45,012)
Other non-operating expenses ........ (144) -- -- (1,259)
--------- --------- ------- ----------
Total non-operating items ............ (149) (2) -- (43,878)
--------- ---------- ------- ----------
Income (loss) before income taxes..... (4,223) (1,417) 266 (128,332)
Income taxes ......................... -- -- -- --
--------- --------- ------- ----------
Income (loss) before extraordinary
charge .............................. (4,223) (1,417) 266 (128,332)
Extraordinary charge on early
retirement of debt .................. -- -- -- (2,935)
--------- --------- ------- ----------
Net income (loss) .................... $(4,223) $(1,417) $ 266 $ (131,267)
========= ========= ======= ==========
</TABLE>
F-56
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
13. Consolidating Financial Information and Subsidiary Guarantors
-- (Continued)
Consolidating Statement of Cash Flows - Year Ended December 31, 1999
<TABLE>
<CAPTION>
Holdings DBS Systems
---------- --------------- --------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) ........................... $ (390) $(13,041) $ (112,462)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization .............. -- -- 32,562
Amortization of debt discount, deferred
financing costs and other ................ -- 12,550 1,126
Earned stock compensation .................. -- -- 154
Extraordinary charge on early
retirement of debt ....................... -- -- 2,935
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of
unearned revenue ........................ -- -- (472)
Other receivables ........................ -- -- 238
Inventory ................................ -- -- 6,730
Prepaid expenses and other ............... -- -- 177
Trade accounts payable ................... -- -- 9,376
Interest payable ......................... -- 20 650
Accrued payroll and other ................ 391 466 1,105
------ -------- ----------
Net cash provided by (used in) operating
activities ................................. 1 (5) (57,881)
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets........ -- -- (35,339)
Purchases of minority interests ............. -- -- (1,439)
Proceeds from interest escrow account ....... -- -- 24,224
Release of amounts reserved for
contingent reduction of bank debt .......... -- -- 5,449
Investment earnings placed in escrow ........ -- -- (1,787)
Purchases of property and equipment ......... -- -- (3,423)
Other ....................................... -- -- 114
------ ---------- ----------
Net cash used in investing activities ....... -- -- (12,201)
Cash Flows From Financing Activities
Bank borrowing .............................. -- -- 38,000
Principal payments on bank debt ............. -- -- (53,000)
Principal payments on notes payable and
obligations under capital leases ........... -- -- (8,846)
Increase in deferred financing costs ........ -- (4,648) (868)
Capital contribution from minority
partner .................................... -- -- 1,428
Capital Contribution to Systems ............. -- (95,391) 95,391
Net proceeds from issuance of 13 1/2%
Notes ...................................... -- 100,049 --
------ ---------- ----------
Net cash provided by financing activities.... -- 10 72,105
------ ---------- ----------
Net increase (decrease) in cash and cash
equivalents ................................ 1 5 2,023
Cash and cash equivalents, beginning of
period ..................................... 28 -- 827
------ ---------- ----------
Cash and cash equivalents, end of period..... $ 29 $ 5 $ 2,850
====== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Consolidating
Non- and
Guarantor guarantor Eliminating
Subsidiaries Subsidiaries Adjustments Consolidated
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities
Net income (loss) ........................... $(4,223) $ (1,417) $ 266 $ (131,267)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization .............. 3,054 347 -- 35,963
Amortization of debt discount, deferred
financing costs and other ................ -- 266 (266) 13,676
Earned stock compensation .................. -- -- -- 154
Extraordinary charge on early
retirement of debt ....................... -- -- -- 2,935
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of
unearned revenue ........................ (126) 57 -- (541)
Other receivables ........................ 87 18 845 1,188
Inventory ................................ 252 56 -- 7,038
Prepaid expenses and other ............... 29 1 -- 207
Trade accounts payable ................... (31) 9 -- 9,354
Interest payable ......................... -- -- -- 670
Accrued payroll and other ................ (97) (1,498) (845) (478)
------- -------- ------- ----------
Net cash provided by (used in) operating
activities ................................. (1,055) (2,161) -- (61,101)
Cash Flows From Investing Activities
Acquisitions of Rural DIRECTV Markets........ -- -- -- (35,339)
Purchases of minority interests ............. -- -- -- (1,439)
Proceeds from interest escrow account ....... -- -- -- 24,224
Release of amounts reserved for
contingent reduction of bank debt .......... -- -- -- 5,449
Investment earnings placed in escrow ........ -- -- -- (1,787)
Purchases of property and equipment ......... -- (29) -- (3,452)
Other ....................................... (2) -- -- 112
---------- -------- ------- ----------
Net cash used in investing activities ....... (2) (29) -- (12,232)
Cash Flows From Financing Activities
Bank borrowing .............................. -- -- -- 38,000
Principal payments on bank debt ............. -- -- -- (53,000)
Principal payments on notes payable and
obligations under capital leases ........... -- -- -- (8,846)
Increase in deferred financing costs ........ -- -- -- (5,516)
Capital contribution from minority
partner .................................... -- -- -- 1,428
Capital Contribution to Systems ............. -- -- -- --
Net proceeds from issuance of 13 1/2%
Notes ...................................... -- -- -- 100,049
--------- -------- ------- ----------
Net cash provided by financing activities.... -- -- -- 72,115
--------- -------- ------- ----------
Net increase (decrease) in cash and cash
equivalents ................................ (1,057) (2,190) -- (1,218)
Cash and cash equivalents, beginning of
period ..................................... 1,189 2,444 -- 4,488
--------- -------- ------- ----------
Cash and cash equivalents, end of period..... $ 132 $ 254 $ -- $ 3,270
========= ======== ======= ==========
</TABLE>
F-57
<PAGE>
GOLDEN SKY HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
14. Quarterly Financial Data (Unaudited)
Golden Sky's quarterly results of operations are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------
March 31 June 30 September 30 December 31
------------ ----------- -------------- ------------
<S> <C> <C> <C> <C>
Period Ended December 31, 1998:
Total revenue ............................ $ 14,129 $ 16,849 $ 19,912 $ 25,034
Operating loss ........................... (6,034) (8,806) (11,462) (16,884)
Loss before extraordinary charge ......... (8,287) (11,761) (17,354) (24,749)
Net loss ................................. (8,287) (14,338) (17,354) (24,749)
Period Ended December 31, 1999:
Total revenue ............................ $ 29,036 $ 31,389 $ 36,732 $ 43,416
Operating loss ........................... (16,734) (19,166) (29,930) (18,624)
Loss before extraordinary charge ......... (25,872) (30,104) (41,087) (31,269)
Net loss ................................. (28,807) (30,104) (41,087) (31,269)
</TABLE>
F-58
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Basis of Presentation
Pro forma consolidated statement of operations data and other data for the
year ended December 31, 1999 include (i) the pending sale of our Puerto Rico
cable system, (ii) the closing of the new Pegasus Media & Communications credit
facility, (iii) the convertible preferred stock offering and (iv) the merger
with Golden Sky, all as if these events had occurred at the beginning of 1999.
The pro forma consolidated balance sheet as of December 31, 1999 gives
effect to (i) the investment in Personalized Media, (ii) the pending sale of
our Puerto Rico cable system, (iii) the closing of the new Pegasus Media &
Communications credit facility, (iv) the convertible preferred stock offering
and (v) the merger with Golden Sky, all as if these events had occurred on
December 31, 1999.
The acquisitions are accounted for using the purchase method of
accounting. The total costs of such acquisitions are allocated to the tangible
and intangible assets acquired and liabilities assumed based upon their
respective fair values. The allocation of the purchase price included in the
pro forma financial statements is preliminary. We do not expect that the final
allocation of the purchase price will significantly differ from the preliminary
allocation.
The pro forma adjustments are based upon available information and upon
certain assumptions that we believe are reasonable. The pro forma consolidated
financial information should be read in conjunction with our consolidated
financial statements and notes thereto, Golden Sky's consolidated financial
statements and notes thereto, the notes to pro forma consolidated statement of
operations data and the notes to pro forma consolidated balance sheet. The pro
forma consolidated financial information is not necessarily indicative of our
future results of operations. There can be no assurance whether or when the
pending sale of our Puerto Rico cable system will be consummated.
F-59
<PAGE>
Pegasus Communications Corporation
Consolidated Statement of Operations Data
Year Ended December 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
Pending
Actual Cable Sale(a) Adjustments Subtotal
------------- --------------- ------------------ -------------
<S> <C> <C> <C> <C>
Net revenues:
DBS .......................... $ 286,353 $ 286,353
Broadcast .................... 36,415 36,415
--------- ---------
Total net revenues .......... 322,768 322,768
Operating expenses:
DBS
Programming, technical
and general and
administrative ............. 201,158 201,158
Marketing and selling ....... 117,774 117,774
Incentive compensation 1,592 1,592
Depreciation and
amortization ............... 82,744 82,744
Broadcast
Programming, technical
and general and
administrative ............. 22,812 22,812
Marketing and selling ....... 6,304 6,304
Incentive compensation 57 57
Depreciation and
amortization ............... 5,144 5,144
Corporate expenses ........... 5,975 5,975
Corporate depreciation
and amortization ............ 3,119 3,119
Other expense, net ........... 1,995 1,995
--------- ---------
Loss from operations ........ (125,906) (125,906)
Interest expense .............. (64,904) ($ 9,982)(b) (74,886)
Interest income ............... 1,356 1,356
Other non-operating
expenses .....................
--------- ------- -------- ---------
Loss from continuing
operations before
income taxes, equity
loss and
extraordinary items ........ (189,454) (9,982) (199,436)
Benefit for income taxes ...... (8,892) (8,892)
Equity in net loss of
unconsolidated affiliate ..... (201) (201)
--------- ------- -------- ---------
Loss from continuing
operations before
extraordinary items ........ (180,763) (9,982) (190,745)
Discontinued operations:
Income from
discontinued
operations of cable
segment, net of
income taxes ............... 2,128 ($ 1,756) (372)(c)
--------- ------- -------- ---------
Loss before
extraordinary items ........ (178,635) (1,756) (10,354) (190,745)
Extraordinary loss from
extinguishment of debt,
net .......................... (6,178) 6,178 (d)
--------- ------- -------- ---------
Net income (loss) ........... (184,813) (1,756) (4,176) (190,745)
Preferred stock
dividends .................. 16,706 19,500 (e) 36,206
--------- ------- -------- ---------
Net income (loss)
applicable to
common shares .............. ($ 201,519) ($ 1,756) ($ 23,676) ($ 226,951)
========= ======= ======== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Golden Sky
-------------------------------------------------
Actual Adjustments Subtotal Adjustments Pro Forma
------------- ------------------ -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues:
DBS .......................... $ 140,573 $ 140,573 $ 426,926
Broadcast .................... 36,415
---------
Total net revenues .......... 140,573 140,573 463,341
Operating expenses:
DBS
Programming, technical
and general and
administrative ............. 124,131 124,131 ($ 782)(g) 324,507
Marketing and selling ....... 64,933 64,933 182,707
Incentive compensation 782(g) 2,374
Depreciation and
amortization ............... 35,963 35,963 96,891(h) 215,598
Broadcast
Programming, technical
and general and
administrative ............. 22,812
Marketing and selling ....... 6,304
Incentive compensation 57
Depreciation and
amortization ............... 5,144
Corporate expenses ........... 5,975
Corporate depreciation
and amortization ............ 3,119
Other expense, net ........... 1,995
--------- ----------- --------- ------- ---------
Loss from operations ........ (84,454) (84,454) (96,891) (307,251)
Interest expense .............. (45,012) (45,012) (119,898)
Interest income ............... 2,393 2,393 3,749
Other non-operating
expenses ..................... (1,259) (1,259) (1,259)
--------- ----------- --------- ------- ---------
Loss from continuing
operations before
income taxes, equity
loss and
extraordinary items ........ (128,332) (128,332) (96,891) (424,659)
Benefit for income taxes ...... (8,892)
Equity in net loss of
unconsolidated affiliate ..... (201)
--------- ----------- --------- ------- ---------
Loss from continuing
operations before
extraordinary items ........ (128,332) (128,332) (96,891) (415,968)
Discontinued operations:
Income from
discontinued
operations of cable
segment, net of
income taxes ...............
--------- ----------- --------- ------- ---------
Loss before
extraordinary items ........ (128,332) (128,332) (96,891) (415,968)
Extraordinary loss from
extinguishment of debt,
net .......................... (2,935) $ 2,935(d)
--------- ----------- --------- ------- ---------
Net income (loss) ........... (131,267) 2,935 (128,332) (96,891) (415,968)
Preferred stock
dividends .................. 17,920 (17,920)(f) 36,206
--------- ----------- --------- ------- ---------
Net income (loss)
applicable to
common shares .............. ($ 149,187) $ 20,855 ($ 128,332) ($96,891) ($ 452,174)
========= =========== ========= ======= =========
</TABLE>
F-60
<PAGE>
Notes to Pro Forma Consolidated Statement of Operations Data
(a) Financial results of the Puerto Rico cable operations of Pegasus Cable
Television. The pro forma income statement data for the year ended December
31, 1999 does not include a $89.4 million gain resulting from the pending
sale of our Puerto Rico cable operations.
(b) Interest expense is adjusted to give effect to the transactions as follows
(in thousands):
Year Ended
December 31, 1999
------------------
Senior notes ................................... $40,194
Senior subordinated notes ...................... 10,625
Credit facilities .............................. 22,000
Sellers' notes ................................. 2,056
Capital leases and other ....................... 11
-------
Total interest expense ....................... 74,886
Interest expense previously recorded ........... 64,904
-------
Adjustment ..................................... $ 9,982
=======
(c) To eliminate certain nonrecurring expenses related to the pending sale of
our Puerto Rico cable operations.
(d) To eliminate the nonrecurring extraordinary net loss from the
extinguishment of debt. The pro forma income statement data for the year
ended December 31, 1999 also does not include the $6.1 million
extraordinary net loss from the extinguishment of debt resulting from the
closing of the new Pegasus Media & Communications credit facility.
(e) To record preferred dividends as a result of the convertible preferred
stock offering.
(f) To eliminate Golden Sky preferred stock dividends as a result of the merger
with Pegasus.
(g) To reclassify incentive compensation.
(h) To record additional amortization expense resulting from the purchase
accounting treatment of the Golden Sky merger and capitalized acquisition
costs. Substantially all of the purchase price has been allocated to direct
broadcast satellite rights. Such amounts are based on a preliminary
allocation of the total consideration. The actual amortization may change
insignificantly based upon the final allocation of the total consideration
to be paid.
F-61
<PAGE>
Pegasus Communications Corporation
Pro Forma Consolidated Balance Sheet
December 31, 1999
(Dollars in thousands)
<TABLE>
<CAPTION>
PMC Pending
Actual Investment(a) Cable Sale(b)
------------- --------------- ---------------
<S> <C> <C> <C>
ASSETS
Cash and cash
equivalents .................. $ 40,453 ($ 14,250) $ 170,000
Restricted cash ............... 2,379
Accounts receivable, net 31,984
Inventory ..................... 10,020 (528)
Prepaid expenses and
other current assets ......... 9,506
Property and equipment,
net .......................... 44,415 (16,870)
Intangibles, net .............. 760,637 (63,233)
Other non-current assets ..... 45,938 111,805
----------- -------- ---------
Total assets ................ $ 945,332 $ 97,555 $ 89,369
=========== ======== =========
LIABILITIES AND
TOTAL EQUITY
Accounts payable and
accrued expenses ............. $ 67,752
Accrued interest .............. 11,592
Current portion of
long-term debt ............... 15,488
Current portion of
program rights payable ....... 4,446
Long-term debt, net ........... 11,950
Senior Notes .................. 370,000
Senior Subordinated
Notes ........................ 82,776
Credit Facilities ............. 204,200
Program rights payable,
net .......................... 4,211
Other long term
liabilities .................. 90,310
Minority Interest ............. 3,000
Series A Preferred Stock 142,734
Series C Preferred Stock
Preferred Stock ...............
Class A Common Stock .......... 152 $ 2
Class B Common Stock .......... 46
Additional paid in capital 237,566 97,553
Deficit ....................... (300,704) $ 89,369
Class A Common Stock
in treasury .................. (187)
----------- -------- ---------
Total liabilities and
equity ..................... $ 945,332 $ 97,555 $ 89,369
=========== ======== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Golden Sky
Other(c) Subtotal Actual Adjustments(d) Pro Forma
------------ ------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents .................. $353,337 $ 549,540 $ 3,270 ($ 4,900) $ 547,910
Restricted cash ............... 2,379 23,731 26,110
Accounts receivable, net ...... 31,984 4,406 36,390
Inventory ..................... 9,492 3,108 12,600
Prepaid expenses and
other current assets ......... 9,506 1,652 11,158
Property and equipment,
net .......................... 27,545 5,853 33,398
Intangibles, net .............. 1,899 699,303 248,388 4,900
617,955
346,055 1,916,601
Other non-current assets ...... 157,743 260 158,003
-------- ---------- ----------- ---------- ----------
Total assets ................ $355,236 $1,487,492 $ 290,668 $ 964,010 $2,742,170
======== ========== =========== ========== ==========
LIABILITIES AND
TOTAL EQUITY
Accounts payable and
accrued expenses ............. $ 67,752 $ 23,826 $ 91,578
Accrued interest .............. 11,592 11,679 23,271
Current portion of
long-term debt ............... 15,488 3,248 18,736
Current portion of
program rights payable ....... 4,446 4,446
Long-term debt, net ........... 11,950 7,035 18,985
Senior Notes .................. 370,000 112,095 482,095
Senior Subordinated
Notes ........................ 82,776 195,000 277,776
Credit Facilities ............. $ 70,800 275,000 52,000 327,000
Program rights payable,
net .......................... 4,211 4,211
Other long term
liabilities .................. 90,310 $ 346,055 436,365
Minority Interest ............. 3,000 936 3,936
Series A Preferred Stock ...... 142,734 142,734
Series C Preferred Stock ...... 290,525 290,525 290,525
Preferred Stock ............... 138,352 (138,352)
Class A Common Stock .......... 154 65 219
Class B Common Stock .......... 46 46
Additional paid in capital 335,119 179 502,560 837,858
Deficit ....................... (6,089) (217,424) (253,682) 253,682 (217,424)
Class A Common Stock
in treasury .................. (187) (187)
-------- ---------- ----------- ---------- ----------
Total liabilities and
equity ..................... $355,236 $1,487,492 $ 290,668 $ 964,010 $2,742,170
======== ========== =========== ========== ==========
</TABLE>
F-62
<PAGE>
Notes to Pro Forma Consolidated Balance Sheet
(a) To record the investment in Personalized Media. The total investment of
$111.8 million consists of $14.3 million in cash, 200,000 shares of
Pegasus' Class A common stock, valued at $93.875 per share, and warrants to
purchase 1.0 million shares of Pegasus' Class A common stock.
(b) To record the pending sale of the Puerto Rico Cable operations resulting in
a nonrecurring gain of $89.4 million.
(c) To record the closing of the new Pegasus Media & Communications credit
facility and the proceeds from the convertible preferred stock offering and
the uses of such proceeds.
(d) To record the pending acquisition of Golden Sky. This acquisition is being
accounted for using the purchase method of accounting. The purchase price
of $1.3 billion was determined by combining the approximately 6.5 million
shares and options of Pegasus Class A common stock, valued at $95.07 per
share, issued to the shareholders of Golden Sky and the assumption of net
liabilities amounting to $363.5 million (total assets of $290.7 million
less intangibles of $248.4 million less total liabilities of $405.8
million). Pegasus also recorded approximately $346.1 million of a deferred
tax liability which was allocated to direct broadcast satellite rights. The
deferred tax liability was recorded primarily as a result of non-deductible
amortization. Of the $1.3 billion purchase price, $1.2 billion was
allocated to direct broadcast satellite rights, which are being amortized
over a 10-year period. Additionally, Pegasus recorded $4.9 million of
intangibles relating to the costs associated with the acquisition of Golden
Sky and restructuring charges. Such amounts are based on a preliminary
allocation of the total consideration. The actual allocation may change
insignificantly based upon the actual results of Golden Sky from the period
January 1, 2000 to closing.
F-63
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF MERGER
among
PEGASUS COMMUNICATIONS CORPORATION
and certain of its shareholders,
PEGASUS GSS MERGER SUB, INC.
and
GOLDEN SKY HOLDINGS, INC.
and certain of its shareholders
-------------------------
January 10, 2000
as amended January 25, 2000
-------------------------
I-1
<PAGE>
TABLE OF CONTENTS
Page
-----
Article I DEFINITIONS ................................................ I-6
1.1 Certain Definitions ............................................ I-12
1.2 Other Definitions .............................................. I-12
Article II BASIC TRANSACTION ......................................... I-12
2.1 Merger; Surviving Corporation .................................. I-13
2.2 Certificate of Incorporation ................................... I-13
2.3 By-Laws ........................................................ I-13
2.4 Directors and Officers ......................................... I-13
2.5 Effective Time ................................................. I-13
2.6 Exchange of Certificates ....................................... I-13
2.7 Merger Consideration; Conversion and Cancellation of Securities I-13
2.8 Stock Transfer Books ........................................... I-15
2.9 Dissenting Shares .............................................. I-15
2.10 Failure to Surrender Share Certificates ........................ I-15
2.11 Closing ........................................................ I-15
2.12 Treatment of Certain Outstanding Options and Warrants .......... I-15
2.13 Certain Expenses ............................................... I-15
Article III REPRESENTATIONS AND WARRANTIES OF THE COMPANY ............ I-16
3.1 Organization and Qualification ................................. I-16
3.2 Capitalization ................................................. I-16
3.3 Authority and Validity ......................................... I-17
3.4 No Breach or Violation ......................................... I-17
3.5 Consents and Approvals ......................................... I-18
3.6 Title to Assets ................................................ I-18
3.7 Intellectual Property .......................................... I-19
3.8 Compliance with Legal Requirements ............................. I-19
3.9 Financial and Other Information ................................ I-19
3.10 Subsequent Events .............................................. I-19
3.11 Undisclosed Liabilities ........................................ I-20
3.12 Legal Proceedings .............................................. I-20
3.13 Taxes .......................................................... I-20
3.14 Employee Benefits; Employees ................................... I-21
3.15 Contracts ...................................................... I-23
3.16 Books and Records .............................................. I-24
3.17 Business Information ........................................... I-24
3.18 Insurance ...................................................... I-24
3.19 Environmental Matters .......................................... I-25
3.20 Disclosure ..................................................... I-25
3.21 Brokers or Finders ............................................. I-25
3.22 Certain Payments ............................................... I-25
3.23 Subscribers .................................................... I-26
3.24 Billing and Authorization System ............................... I-26
Article IV REPRESENTATIONS AND WARRANTIES OF THE PRINCIPAL COMPANY
SHAREHOLDERS .................................................. I-26
4.1 Authority and Validity ......................................... I-26
4.2 Ownership ...................................................... I-26
4.3 Consents and Approvals ......................................... I-27
4.4 Certain Information ............................................ I-27
4.5 Compliance with Legal Requirements ............................. I-27
I-2
<PAGE>
Page
-----
Article V REPRESENTATIONS AND WARRANTIES OF PEGASUS ............... I-27
5.1 Organization and Qualification .............................. I-27
5.2 Capitalization .............................................. I-27
5.3 Authority and Validity ...................................... I-28
5.4 No Breach or Violation ...................................... I-28
5.5 Consents and Approvals ...................................... I-28
5.6 Title to Assets ............................................. I-29
5.7 Intellectual Property ....................................... I-29
5.8 Compliance with Legal Requirements .......................... I-29
5.9 Legal Proceedings ........................................... I-29
5.10 Subsequent Events ........................................... I-29
5.11 Financial and Other Information ............................. I-30
5.12 Undisclosed Liabilities ..................................... I-30
5.13 Taxes ....................................................... I-31
5.14 Employee Benefits; Employees ................................ I-31
5.15 Contracts ................................................... I-32
5.16 Business Information ........................................ I-32
5.17 Disclosure .................................................. I-33
5.18 Brokers or Finders .......................................... I-33
5.19 Certain Payments ............................................ I-33
5.20 Subscribers ................................................. I-33
5.21 Favorable Business Relationships ............................ I-33
5.22 Securities Matters .......................................... I-33
5.23 FCC Matters ................................................. I-33
5.24 Environmental Matters ....................................... I-34
5.25 Billing and Authorization System ............................ I-34
Article VI REPRESENTATIONS AND WARRANTIES OF MERGER SUB ........... I-34
6.1 Organization and Qualification .............................. I-35
6.2 Certificate of Incorporation and Bylaws ..................... I-35
6.3 Authority ................................................... I-35
6.4 No Conflict; Required Filings and Consents .................. I-36
6.5 Vote Required ............................................... I-36
Article VII PRE-CLOSING COVENANTS OF THE SELLERS .................. I-36
7.1 Additional Information ...................................... I-36
7.2 Exclusivity ................................................. I-36
7.3 Continuity and Maintenance of Operations .................... I-37
7.4 Consents and Approvals ...................................... I-38
7.5 Adoption by Shareholders .................................... I-39
7.6 Securities Filings; Financial Information ................... I-39
7.7 Notification of Certain Matters ............................. I-39
7.8 Supplements to Company Disclosure Statement ................. I-39
7.9 Employee Matters ............................................ I-39
7.10 1999 Company Financial Statements ........................... I-40
7.11 1999 Tax Returns ............................................ I-40
7.12 Indemnity under Prior Company Acquisitions .................. I-40
7.13 Tax Certificate ............................................. I-40
7.14 NRTC Litigation Expenses .................................... I-40
Article VIII PRE-CLOSING COVENANTS OF THE PEGASUS PARTIES ......... I-40
8.1 Additional Information ...................................... I-40
8.3 Conduct of Business ......................................... I-41
8.4 Consents and Approvals ...................................... I-41
8.5 Adoption by Pegasus Shareholders ............................ I-42
I-3
<PAGE>
Page
----
8.6 Merger Registration Statement ....................................... I-42
8.7 Notification of Certain Matters ..................................... I-42
8.8 Tax Certificate ..................................................... I-43
8.9 Supplements to Pegasus Disclosure Statement ......................... I-43
8.10 Purchase of Certain Shares of Company Capital Stock ................. I-43
Article IX CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PEGASUS PARTIES ..... I-44
9.1 Accuracy of Representations ......................................... I-44
9.2 Covenants ........................................................... I-44
9.3 Consents and Approvals .............................................. I-44
9.4 Dissenters' Rights .................................................. I-45
9.5 Delivery of Documents ............................................... I-45
9.6 No Material Adverse Change .......................................... I-46
9.7 No Litigation ....................................................... I-46
9.8 NRTC Compliance Certificate ......................................... I-46
9.9 South Plains ........................................................ I-46
Article X CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS .............. I-46
10.1 Accuracy of Representations ........................................ I-46
10.2 Covenants .......................................................... I-47
10.3 Consents and Approvals ............................................. I-47
10.4 Delivery of Documents .............................................. I-47
10.5 No Material Adverse Change ......................................... I-48
10.6 Litigation ......................................................... I-48
10.7 Nasdaq Listing ..................................................... I-48
10.8 Pegasus Merger Registration Statement .............................. I-48
Article XI POST-CLOSING COVENANTS ......................................... I-48
11.1 Transition ......................................................... I-48
11.2 Indemnification of Directors, Officers and Managers of the
Company and its Predecessors; Directors' and Officers' Insurance ... I-48
11.3 Offers to Purchase ................................................. I-49
11.4 Confidentiality .................................................... I-49
Article XII TERMINATION ................................................... I-51
12.1 Events of Termination .............................................. I-51
12.2 Effect of Termination .............................................. I-52
12.3 Procedure Upon Termination ......................................... I-52
Article XIII INDEMNIFICATION .............................................. I-52
13.1 Survival of Representations and Warranties ......................... I-52
13.2 Indemnification Provisions for Benefit of the Pegasus Parties ...... I-52
13.3 Indemnification Provisions for Benefit of the Shareholders ......... I-54
13.4 Matters Involving Third Parties .................................... I-54
13.5 Determination of Adverse Consequences .............................. I-55
13.6 Payment in Shares .................................................. I-55
13.7 No Indemnification for Certain Disclosed Matters ................... I-55
Article XIV MISCELLANEOUS ................................................. I-56
14.1 Parties Obligated and Benefited .................................... I-56
14.2 Notices ............................................................ I-56
14.3 Attorneys' Fees .................................................... I-57
14.4 Headings ........................................................... I-57
14.5 Choice of Law ...................................................... I-57
14.6 Rights Cumulative .................................................. I-57
14.7 Further Actions .................................................... I-57
14.8 Time of the Essence ................................................ I-57
14.9 Late Payments ...................................................... I-57
14.10 Counterparts ....................................................... I-57
I-4
<PAGE>
Page
-----
14.11 Entire Agreement ................... I-57
14.12 Amendments and Waivers ............. I-58
14.13 Construction ....................... I-58
14.14 Expenses ........................... I-58
14.15 Disclosure ......................... I-58
14.16 Shareholder Representative ......... I-58
Exhibits
Exhibit 1 Form of Escrow Agreement
Exhibit 2 [There is no Exhibit 2]
Exhibit 3 [There is no Exhibit 3]
Exhibit 4 Registration Rights Agreement
Exhibit 5 Voting Agreement
Exhibit 6 Certificate of Merger
Exhibit 7 Company Tax Certificate
Exhibit 8 Pegasus Tax Certificate
Exhibit 9 Purchase Agreement for Section 8.10 Purchases
Exhibit 10 Conversion Ratios
Exhibit 11 [There is no Exhibit 11]
Exhibit 12 Amendments to DTS Registration Rights Agreement
I-5
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated January 10, 2000 (the "Agreement"),
among PEGASUS COMMUNICATIONS CORPORATION, a Delaware corporation ("Pegasus"),
PEGASUS GSS MERGER SUB, INC., a Delaware corporation ("Merger Sub"), GOLDEN SKY
HOLDINGS, INC., a Delaware corporation (the "Company"), the shareholders of
Pegasus that have executed this Agreement (the "Principal Pegasus
Shareholders"), and the shareholders of the Company that have executed this
Agreement (the "Principal Company Shareholders"). Pegasus, Merger Sub, the
Company, the Principal Pegasus Shareholders and the Principal Company
Shareholders are collectively referred to herein as the "Parties." The Company
and the Principal Company Shareholders are sometimes referred to herein
collectively as the "Sellers." Pegasus, Merger Sub and the Principal Pegasus
Shareholders are sometimes referred to herein collectively as the "Pegasus
Parties."
RECITALS:
Subsidiaries (this and certain other terms are defined in Article I) of
the Company are party to certain NRTC Distribution Agreements with the National
Rural Telecommunications Cooperative ("NRTC"), pursuant to which Subsidiaries
of the Company hold certain rights to distribute DIRECTV(R) ("DIRECTV")
programming offered by DirecTV, Inc. in the Service Areas.
The Parties intend for Pegasus to acquire the Company and its Subsidiaries
by means of the merger of Merger Sub with and into the Company, upon the terms
and subject to the conditions set forth herein.
For federal income tax purposes, it is intended that the Merger will
qualify as a reorganization under Section 368(a) of the Code.
NOW, THEREFORE, in consideration of the premises and mutual promises
herein made, and in consideration of the representations, warranties, covenants
and agreements herein contained, and intending to be legally bound hereby, the
Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions. The following terms shall, when used in this
Agreement, have the following meanings:
"Accounts Receivable" means the accounts receivable reported on NRTC
Report 19A/AR012FS.
"Acquisition" means the acquisition by a Person of any DIRECTV
Distribution Business, including related assets or property, whether or not in
the Ordinary Course, and the acquisition by a Person of any other businesses,
assets or property other than in the Ordinary Course, whether by way of the
purchase of assets or stock, by merger, consolidation or otherwise.
"Adverse Consequences" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, assessments, dues, penalties, fines,
interest, costs, amounts paid in settlement, Liabilities, obligations, Taxes,
liens, losses, expenses and fees (including court costs, settlement costs,
legal, accounting, experts' and other fees, costs and expenses).
"Affiliate" means, with respect to any Person: (i) any Person directly or
indirectly owning, controlling, or holding with power to vote 10% or more of
the outstanding voting securities of such other Person; (ii) any Person 10% or
more of whose outstanding voting securities are directly or indirectly owned,
controlled, or held with power to vote, by such other Person; (iii) any Person
directly or indirectly controlling, controlled by, or under common control with
such other Person; and (iv) any officer, director or partner of such other
Person. "Control" for the foregoing purposes shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities or voting interests, by contract or otherwise.
"Applicable Rate" means the prime rate reported in The Wall Street Journal
from time to time, plus 3%.
I-6
<PAGE>
"Assets" mean all properties, assets, privileges, powers, rights,
interests and claims of every type and description that are owned, leased,
held, used or useful in the Business and in which the Company or any of its
Subsidiaries has any right, title or interest or in which the Company or any of
its Subsidiaries acquires any right, title or interest on or before the Closing
Date, wherever located, whether known or unknown, and whether or not now or on
the Closing Date on the books and records of the Company or any of its
Subsidiaries, including Accounts Receivable, books and records, Consumer
Contracts, Contracts, Intangibles, Intellectual Property, Inventory, NRTC
Patronage Capital, other obligations of NRTC to the Company, Personal Property,
Real Property and subscribers.
"Business" means the DIRECTV distribution business conducted by the
Company and its Subsidiaries pursuant to rights granted under the NRTC
Distribution Agreements.
"Business Day" means any day other than Saturday, Sunday or a day on which
banking institutions in New York, New York, are required or authorized to be
closed.
"Change of Control Offer" means a Change of Control Offer (as defined in
each of the Company Indentures) required by Section 10.10 of each of the
Company Indentures to be made as a result of the Merger.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral Documents" mean the Exhibits and any other documents,
instruments and certificates to be executed and delivered by the Parties
hereunder or thereunder.
"Commercial Account" means any bar, restaurant, business or similar
establishment that provides DIRECTV services to its patrons using a single
DIRECTV System for all channels and is required to execute a DIRECTV Commercial
Viewing Agreement.
"Commercial Agreement" means DIRECTV Commercial Viewing Agreements and
1999 NFL Sunday Ticket Commercial Establishment License Agreements relating to
Commercial Accounts.
"Commission" means the Securities and Exchange Commission or any
Governmental Authority that succeeds to its functions.
"Committed Member Residence" has the meaning assigned to it in the NRTC
Distribution Agreements.
"Company 1999 Forms 10-K" means the Annual Reports on Form 10-K for the
year ended December 31, 1999, of Golden Sky Systems, Inc. and Golden Sky DBS,
Inc., as and when filed with the Commission.
"Company Credit Agreement" means the Amended and Restated Credit
Agreement, dated as of July 7, 1997, amended and restated as of May 8, 1998 and
as further amended by a First Amendment to Amended and Restated Credit
Agreement dated as of February 10, 1999, by an Amendment and Waiver dated as of
June 14, 1999, and by a Second Amendment, Consent and Waiver dated as of
January 4, 2000, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc., and
the various banks and agents identified therein, as amended, restated,
supplemented or otherwise modified from time to time.
"Company Disclosure Statement" means the disclosure statement delivered by
the Company to Pegasus concurrently with the execution of this Agreement, as
supplemented pursuant to Section 7.8.
"Company Financial Model" means the Company's financial projections
attached as Exhibit A to the Company Disclosure Statement, as updated from time
to time pursuant to Section 7.3(c)(i).
"Company Indentures" means (1) the indenture dated as of July 31, 1998 by
and among Golden Sky Systems, Inc., as issuer, Argos Support Services Company,
as guarantor, Prime Watch, Inc., as guarantor, and State Street Bank and Trust
Company of Missouri, N.A., as trustee, relating to the 12 3/8% Senior
Subordinated Notes due 2006, Series B, of Golden Sky Systems, Inc., and (2) the
indenture, dated as of February 19, 1999, between Golden Sky DBS, Inc., as
issuer, and United States Trust Company of New York, as trustee, relating to
the 13 1/2% Senior Discount Notes due 2007, Series A, and 13 1/2% Senior
Discount Notes due 2007, Series B, of Golden Sky DBS, Inc.
I-7
<PAGE>
"Company SEC Filings" means Golden Sky Systems, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998, and its quarterly reports on
Form 10-Q for each of the quarters ended March 31, June 30 and September 30,
1999, and the quarterly reports on Form 10-Q of Golden Sky DBS, Inc. for each
of the quarters ended June 30 and September 30, 1999, each as filed with the
Commission.
"Confidentiality Agreement" means the existing Confidentiality Agreement
among Pegasus, the Company and certain of its Subsidiaries.
"Consumer Contract" means any rental agreement, lease agreement,
installment sale agreement or other agreement or arrangement under which the
Company or any of its Subsidiaries (or predecessors in interest) has rented,
leased or sold any DIRECTV System or other Inventory to a subscriber or has
otherwise financed the acquisition or use of any DIRECTV System or other
Inventory by a subscriber.
"DIRECTV Distribution Business" means the distribution of any service
transmitted using the frequencies licensed to Hughes Communications Galaxy or
its successors at the 101, 110 and 119 degree West orbital locations.
"DIRECTV System" means the satellite receiving system for DIRECTV
consisting of a satellite antenna dish, an integrated receiver decoder and a
remote control.
"Employee Benefit Plan" means any: (a) nonqualified deferred compensation
or retirement plan or arrangement that is an Employee Pension Benefit Plan; (b)
qualified defined contribution retirement plan or arrangement that is an
Employee Pension Benefit Plan; (c) qualified defined benefit retirement plan or
arrangement that is an Employee Pension Benefit Plan (including any
Multiemployer Plan); (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program; or (e) other employee benefit arrangement or payroll
practice.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA Section
3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section
3(l).
"Encumbrance" means any mortgage, pledge, lien, encumbrance, charge,
security interest, security agreement, conditional sale or other title
retention agreement, limitation, option, assessment, restrictive agreement,
restriction, adverse interest, restriction on transfer or any exception to or
defect in title or other ownership interest (including restrictive covenants,
leases and licenses).
"Environmental Law" means any Legal Requirement (including, without
limitation, the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, the Resource Conservation and Recovery Act of 1976 and
the Occupational Safety and Health Act of 1970, as amended), relating to or
concerning pollution or protection of public health, safety or welfare or the
environment, including those relating to emissions, discharges, releases or
threatened releases of Hazardous Substances into the environment (including
ambient air, surface water, ground water or land), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Substances.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agent" means First Union National Bank.
"Escrow Agreement" means an escrow agreement in the form set forth as
Exhibit 1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"Governmental Authority" means: (i) the United States of America; (ii) any
state, commonwealth, territory or possession of the United States of America
and any political subdivision thereof (including counties, municipalities and
the like); (iii) any foreign (as to the United States of America) sovereign
entity and any political subdivision thereof; or (iv) any agency, authority or
instrumentality of any of the foregoing, including any court, tribunal,
department, bureau, commission or board.
I-8
<PAGE>
"Hazardous Substances" means any pollutant, contaminant, chemical,
industrial, toxic, hazardous or noxious substance or waste that is regulated by
any Governmental Authority, including: (a) any petroleum or petroleum compounds
(refined or crude), flammable substances, explosives, radioactive materials or
any other materials or pollutants that pose a hazard or potential hazard to the
Real Property or to Persons in or about the Real Property; (b) asbestos or any
asbestos-containing material of any kind or character; (c) polychlorinated
biphenyls ("PCBs"), as regulated by the Toxic Substances Control Act, 15 U.S.C.
Section 2601 et seq.; (d) any materials or substances designated as "hazardous
substances" pursuant to the Clean Water Act, 33 U.S.C. Section 1251 et seq.;
(e) any "economic poison," as defined in the Federal Insecticide, Fungicide and
Rodenticide Act, 7 U.S.C. Section 135 et seq.; (f) any "chemical substance,"
"new chemical substance" or "hazardous chemical substance or mixture" pursuant
to the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq.; (g) any
"hazardous substances" pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq.; (h) any
"hazardous waste" pursuant to the Resource Conservation and Recovery Act, 42
U.S.C. Section 6901 et seq.; and (i) any "extremely hazardous substance"
pursuant to Section 202 of the Emergency Planning and Community Right-to-Know
Act of 1986, as amended.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Intangibles" mean all accounts, notes and other receivables, claims,
deposits, prepayments, refunds, causes of action, choses in action, rights of
recovery, rights of set-off, rights of recoupment and other intangible assets
owned, used or held for use in the Business.
"Inventory" means the DIRECTV Systems and other equipment owned by the
Company or any of its Subsidiaries for sale, lease or rent to subscribers or
that has been rented or leased to subscribers or sold to subscribers on an
installment basis.
"Judgment" means any judgment, writ, order, injunction, award or decree of
any court, judge, justice, magistrate or any other Governmental Authority.
"Knowledge" of a Principal Company Shareholder means its actual knowledge.
"Legal Requirement" means any statute, ordinance, law, rule, regulation,
code, injunction, judgment, order, decree, ruling, or other requirement
enacted, adopted or applied by any Governmental Authority, including judicial
decisions applying common law or interpreting any other Legal Requirement.
"Liability" means any liability or obligation (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"Market Price" per share of Pegasus Class A Common Stock on any day means
the average of the Quoted Prices of the Pegasus Class A Common Stock for the
five consecutive trading days immediately preceding such day.
"Material Adverse Effect on the Company" means a material adverse effect
on the Company, its Subsidiaries, the Assets and the Business, taken as a
whole.
"Material Adverse Effect on Pegasus" means a material adverse effect on
Pegasus, its Subsidiaries and their assets and business, taken as a whole.
"Merger Consideration" means the shares of Pegasus Class A Common Stock
and the cash in lieu of fractional shares of Pegasus Class A Common Stock
deliverable by Pegasus in exchange for Company Capital Stock pursuant to
Section 2.7.
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
"NRTC Distribution Agreement" means any contract or agreement pursuant to
which NRTC and/or DirecTV, Inc. and/or any of their Affiliates has granted the
Company or any of its Subsidiaries or Pegasus or any of its Subsidiaries, as
the case may be, rights relating to the marketing and distribution of DIRECTV
in
I-9
<PAGE>
the Service Areas, including those certain NRTC/Member Agreements for Marketing
and Distribution of DBS Services, as amended and supplemented, identified in
Section 3.15 of the Company Disclosure Statement or Section 5.15 of the Pegasus
Disclosure Statement, as the case may be.
"NRTC Patronage Capital" means any equity interest in NRTC allocated to
the Company or any of its Subsidiaries or if such equity interest is not
transferable the right of the Company or any of its Subsidiaries to receive any
distributions on account of such equity interest.
"Ordinary Course" with reference to a Person means the ordinary course of
business consistent with past practice of that Person and its Subsidiaries
(including with respect to quantity and frequency).
"Pegasus 1999 Form 10-K" means Pegasus's Annual Report on Form 10-K for
the year ended December 31, 1999, as and when filed with the Commission.
"Pegasus Class A Common Stock" means the Class A Common Stock, par value
$0.01 per share, of Pegasus.
"Pegasus Credit Agreement" means collectively (1) the credit agreement
dated as of December 10, 1997, among Pegasus Media & Communications, Inc., the
lenders party thereto, and Bankers Trust Company, as agent for such lenders,
(2) the Second Amended and Restated Credit Agreement dated as of July 30, 1997,
among Digital Television Services, Inc., the lenders identified therein, and
Canadian Imperial Bank of commerce, New York Agency, as agent, and (3) any
amendment, modification, restatement, replacement or refinancing of either or
both such credit agreements.
"Pegasus Disclosure Statement" means the disclosure statement delivered by
the Pegasus Parties to the Company concurrently with the execution of this
Agreement, as supplemented pursuant to Section 8.8.
"Pegasus SEC Filings" means Pegasus's annual report on form 10-K for the
year ended December 31, 1998, and Pegasus's quarterly reports on form 10-Q for
each of the quarters ended March 31, June 30 and September 30, 1999, each as
filed with the Commission.
"Permit" means any license, permit, consent, approval, registration,
authorization, qualification or similar right granted by a Governmental
Authority.
"Permitted Liens" means (i) liens for Taxes not yet due and payable or
being contested in good faith by appropriate proceedings; (ii) rights reserved
to any Governmental Authority to regulate the affected property; (iii)
statutory liens of banks and rights of set-off; (iv) as to leased Assets,
interests of the lessors and sublessors thereof and liens affecting the
interests of the lessors and sublessors thereof; (v) inchoate materialmen's,
mechanics', workmen's, repairmen's or other like liens arising in the ordinary
course of business; (vi) liens incurred or deposits made in the ordinary course
of business in connection with workers' compensation and other types of social
security; (vii) earnest money deposits made to secure the performance of
contracts to acquire DIRECTV Distribution Businesses, so long as no foreclosure
or similar proceedings have been commenced; (viii) licenses of trademarks or
other intellectual property rights granted by the Company in the ordinary
course and not interfering in any material respect with the ordinary conduct of
the business of the Company; and (ix) as to real property, any encumbrance,
adverse interest, constructive or other trust, claim, attachment, exception to
or defect in title or other ownership interest (including, but not limited to,
reservations, rights of entry, rights of first refusal, possibilities of
reverter, encroachments, easement, rights-of-way, restrictive covenants,
leases, and licenses) of any kind, which otherwise constitutes an interest in
or claim against property, whether arising pursuant to any Legal Requirement,
under any Contract or otherwise, that do not, individually or in the aggregate,
materially and adversely affect or impair the value or use thereof as it is
currently being used in the Ordinary Course.
"Person" means any natural person, corporation, partnership, trust,
unincorporated organization, association, limited liability company,
Governmental Authority or other entity.
"Personal Property" means all tangible personal property of the Company
and its Subsidiaries, whether or not identified in Section 3.6 of the Company
Disclosure Statement.
I-10
<PAGE>
The "Quoted Price" of the Pegasus Class A Common Stock on any day means
the last reported sale price on such day of the Pegasus Class A Common Stock as
reported by the Nasdaq National Market or, if the Pegasus Class A Common Stock
is listed on a securities exchange, the last reported sale price of the Pegasus
Class A Common Stock on such exchange, which shall be for consolidated trading
if applicable to such exchange, or, if not so reported or listed, the last
reported bid price of the Pegasus Class A Common Stock.
"Real Property" means all owned or leased real property used or held for
use in connection with the operation of the Business.
"Registration Rights Agreement" means the form of registration rights
agreement attached hereto as Exhibit 4, except that the provisions contained in
Section 5(a) of Exhibit 4 shall not be included in the Registration Rights
Agreement when executed unless the Registration Rights Agreement dated April
27, 1998 (the "DTS Registration Rights Agreement"), among the Company and
certain former owners of Digital Television Services, Inc. (the "DTS Holders")
is amended prior to Closing in substance as set forth in Exhibit 12.
"Representative" means any director, officer, employee, agent, consultant,
adviser or other representative of a Person, including legal counsel,
accountants and financial advisors.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Service Areas" means the areas identified on Exhibits "C" of the NRTC
Distribution Agreements identified in Section 3.15 of the Company Disclosure
Statement or Section 5.15 of the Pegasus Disclosure Statement, as the case may
be.
"SMATV Account" means any hotel, motel, dormitory, hospital or similar
establishment in the Service Areas that provides DIRECTV services to its
patrons using a single DIRECTV System for each channel and is required to
execute a SMATV Agreement.
"SMATV Agreement" means a DIRECTV SMATV Service Private Viewing Agreement
relating to subscribers in the Service Areas.
"Subsidiary" of a specified Person means (a) any Person if securities
having ordinary voting power (at the time in question and without regard to the
happening of any contingency) to elect a majority of the directors, trustees,
managers or other governing body of such Person are held or controlled by the
specified Person or a Subsidiary of the specified Person; (b) any Person in
which the specified Person and its Subsidiaries collectively hold a 50% or
greater equity interest; (c) any partnership or similar organization in which
the specified Person or Subsidiary of the specified Person is a general
partner; or (d) any Person the management of which is directly or indirectly
controlled by the specified Person and its Subsidiaries through the exercise of
voting power, by contract or otherwise.
"Tax" means any federal, state, local or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental, customs duties, capital stock, franchise,
profits, withholding, social security (or similar), unemployment, disability,
real property, personal property, sales, use, transfer, registration, value
added, alternative or add-on minimum, estimated or other tax of any kind
whatsoever, including any interest, penalties, fees, deficiencies, assessments,
additions or other charges of any nature with respect thereto, whether disputed
or not.
"Tax Return" means any return, declaration, report, claim for refund or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Voting Agreement" means the form of voting agreement attached hereto as
Exhibit 5.
I-11
<PAGE>
1.2 Other Definitions. The following terms shall, when used in this
Agreement, have the meanings assigned to such terms in the Sections indicated.
Term
Section
"Agreement" ........................................................ Preamble
"Certificate of Merger" ................................................. 2.5
"Claim" ................................................................ 11.2
"Closing" .............................................................. 2.11
"Closing Date" ......................................................... 2.11
"Company Alternative Transaction" ....................................... 7.2
"Company Capital Stock" ................................................. 2.7
"Company Financial Statements" ......................................... 3.19
"Company Indemnities" .................................................. 13.3
"Company Intellectual Property Rights" .................................. 3.7
"Contracts". ........................................................... 3.15
"Conversion Ratio" ................................................... 2.7(b)
"DGCL" .................................................................. 2.1
"DIRECTV" .......................................................... Recitals
"Dissenting Shares" ..................................................... 2.9
"Effective Time" .........................................................2.5
"Escrowed Shares" .................................................... 2.7(c)
"FCC" ................................................................. .5.23
"FCC Licenses" ......................................................... 5.23
"GSS Indemnified Parties" .............................................. 11.2
"GSS Parties" ........................................................... 3.3
"Indemnification Period" ............................................... 13.2
"Indemnified Party" ................................................... .13.4
"Indemnifying Party" ................................................... 13.4
"Information Systems" .................................................. 3.24
"Merger" ................................................................ 2.1
"NRTC" ............................................................. Recitals
"Options" ............................................................ 3.2(d)
"Parties" .......................................................... Preamble
"Pegasus Alternative Transaction" ....................................... 8.2
"Pegasus Financial Statements" ......................................... 5.11
"Pegasus Indemnitees" .................................................. 13.2
"Pegasus Merger Registration Statement" ................................. 8.6
"Pegasus Parties" .................................................. Preamble
"Proxy Statement/Prospectus" ............................................ 8.6
"Sellers" .......................................................... Preamble
"Shareholders" .......................................................... 2.6
"Surviving Corporation" ................................................. 2.1
"Third Party Claim" .................................................... 13.4
Article II
BASIC TRANSACTION
2.1 Merger; Surviving Corporation. In accordance with and subject to the
provisions of this Agreement and the General Corporation Law of the State of
Delaware ("DGCL"), at the Effective Time, Merger Sub shall be merged with and
into the Company (the "Merger"), and the Company shall be the surviving
corporation in the Merger (hereinafter sometimes called the "Surviving
Corporation") and shall continue its corporate existence under the laws of the
State of Delaware. At the Effective Time, the separate existence of Merger Sub
shall cease. All properties, franchises and rights belonging to the Company and
Merger Sub, by virtue of the Merger and without further act or deed, shall be
vested in the Surviving Corporation, which shall thenceforth be responsible for
all the liabilities and obligations of each of Merger Sub and the Company.
I-12
<PAGE>
2.2 Certificate of Incorporation. The Company's certificate of
incorporation shall be amended and restated effective at the Effective Time to
be as set forth in the Certificate of Merger, and, as so amended and restated,
shall thereafter continue in full force and effect as the certificate of
incorporation of the Surviving Corporation until altered or amended as provided
therein or by law, to the extent permitted by Section 11.2.
2.3 By-Laws. The Company's by-laws, as in effect at the Effective Time,
shall be the by-laws of the Surviving Corporation until altered, amended or
repealed as provided therein or by law, to the extent permitted by Section
11.2.
2.4 Directors and Officers. The directors of the Surviving Corporation
following the Effective Time shall be the persons serving as directors of
Merger Sub immediately before the Effective Time and shall serve thereafter in
accordance with the certificate of incorporation and by-laws of the Surviving
Corporation and the DGCL. The officers of Merger Sub immediately before the
Effective Time shall serve in the same capacities as officers of the Surviving
Corporation at the pleasure of the board of directors of the Surviving
Corporation following the Effective Time in accordance with the certificate of
incorporation and by-laws of the Surviving Corporation and the DGCL.
2.5 Effective Time. The Merger shall become effective at the time and date
that the certificate of merger (the "Certificate of Merger"), in the form
attached hereto as Exhibit 6, is accepted for filing by the Secretary of State
of the State of Delaware in accordance with the provisions of Section 251 of
the DGCL. The Certificate of Merger shall be executed by the Surviving
Corporation and delivered to the Secretary of State of the State of Delaware
for filing on the Closing Date. The date and time when the Merger becomes
effective are referred to herein as the "Effective Time."
2.6 Exchange of Certificates. At the Closing, immediately after the
Effective Time, all of the shareholders of the Company (the "Shareholders"),
other than the holders of Dissenting Shares, shall surrender to the Surviving
Corporation all of the outstanding certificates theretofore representing shares
of Company Capital Stock in exchange for the Merger Consideration deliverable
to the Shareholders as provided in Section 2.7. Until such certificates are
surrendered, outstanding certificates formerly representing shares of Company
Capital Stock shall be deemed for all purposes as evidencing the right to
receive the Merger Consideration into which such shares are converted as though
said surrender and exchange had taken place. In no event will a holder of
shares of Company Capital Stock be entitled to interest on the Merger
Consideration issuable in respect of such shares.
2.7 Merger Consideration; Conversion and Cancellation of Securities.
(a) Conversion of Company Capital Stock. At the Effective Time of the
Merger all of the issued and outstanding shares of the common stock, par
value of $0.01 per share (the "Company Common Stock"), and all of the
issued and outstanding shares of the Series A Convertible Participating
Preferred Stock, the Series B Convertible Participating Preferred Stock,
the Series A Redeemable Preferred Stock, the Series B Redeemable Preferred
Stock, the Series C Senior Convertible Preferred Stock and the Series D
Redeemable Preferred Stock, each with a par value of $0.01 per share, of
the Company (the "Company Preferred Stock" and, together with the Company
Common Stock, the "Company Capital Stock") outstanding immediately before
the Effective Time, other than shares described in Section 2.7(d) and
other than Dissenting Shares, shall be converted, by virtue of the Merger
and without any further action on the part of the holders thereof, into
the number of shares of Pegasus Class A Common Stock determined as
follows:
(i) 6,500,000 shares of Pegasus Class A Common Stock, minus
(ii) the number of shares of Pegasus Class A Common Stock determined
by dividing the amount paid by Pegasus pursuant to Section 8.10 by the
Market Price per share of the Pegasus Class A Common Stock on the date
of this Agreement; minus
(iii) the number of shares of Pegasus Class A Common Stock issuable
upon exercise of the warrants and options to purchase Pegasus Class A
Common Stock that replace the Options pursuant to Section 2.12; minus
I-13
<PAGE>
(iv) any adjustment under Section 2.13; minus
(v) the number of shares of Pegasus Class A Common Stock that would
otherwise be issuable in respect of Dissenting Shares.
If between the date of this Agreement and the Closing Date, Pegasus shall
subdivide or combine the outstanding Pegasus Class A Common Stock or shall
declare a dividend on Pegasus Class A Common Stock payable in Pegasus Class A
Common Stock, the number of shares of Pegasus Class A Common Stock determined
above shall be adjusted by multiplying the number of shares so determined by a
fraction of which the numerator is the number of shares of Pegasus Class A
Common Stock outstanding immediately after such event and the denominator is
the number of shares of Pegasus Class A Common Stock immediately before such
event.
(b) Conversion Ratio; Escrowed Shares; Delivery of Shares at
Closing. The ratio of the number of shares of Pegasus Class A Common Stock
into which each share of each series of the Company Preferred Stock and
each share of Company Common Stock, respectively, shall be converted (the
"Conversion Ratio" of each such series and of the Company Common Stock)
shall be set forth on Exhibit 10, which Exhibit shall be agreed upon and
signed by all the Parties within seven Business Days after the date of
this Agreement.
(c) Not later than 48 hours before the Closing, the Company shall
provide to Pegasus (i) a list of the Shareholders specifying the number of
shares of Pegasus Class A Common Stock to be issued to each such
Shareholder based upon the applicable Conversion Ratios, and (ii) a
calculation based on the Conversion Ratios supporting such list. Both the
list and the calculation shall be certified as correct by the Company, and
Pegasus shall be protected in conclusively relying on the accuracy
thereof. At the Closing, Pegasus shall (subject to Section 2.10) deliver
(A) to the Escrow Agent (subject to the provisions of Section 13.6 and the
Escrow Agreement) share certificates registered in the names of the
Shareholders evidencing 975,000 shares of Pegasus Class A Common Stock
(adjusted as provided in the last sentence of subsection (a)) (the
"Escrowed Shares," which shares shall be deemed to be owned by the
Shareholders (other than holders of Dissenting Shares) in proportion to
their entitlement to the Merger Consideration, subject to the Escrow
Agreement), and (B) to such Shareholders (other than holders of Dissenting
Shares), or a person designated in writing by the Company to serve as
agent for the Shareholders, share certificates registered in the names of
the applicable Shareholders evidencing the balance of the shares of
Pegasus Class A Common Stock to be received by each such Shareholder
(other than holders of Dissenting Shares), rounded down to the nearest
whole share and accompanied by any payment in lieu of fractional shares
required by Section 2.7(f).
(d) Treasury Shares, Etc. Each share of Company Capital Stock held in
the treasury of the Company and each share of Company Capital Stock, if
any, held by Pegasus or any Subsidiary of Pegasus or of the Company
immediately before the Effective Time shall be cancelled and extinguished,
and nothing shall be issued or paid in respect thereof.
(e) Conversion of Merger Sub Shares. Each share of common stock, par
value $1.00 per share, of Merger Sub issued and outstanding immediately
before the Effective Time shall be converted into one share of common
stock, par value $0.01 per share, of the Surviving Corporation.
(f) Fractional Shares. No certificates or scrip evidencing fractional
shares of Pegasus Class A Common Stock shall be issued in exchange for
Company Capital Stock. In lieu of any such fractional shares, each holder
of Company Capital Stock shall be paid an amount in cash (without
interest), rounded to the nearest cent, determined by multiplying (i) the
Market Price on the Closing Date of the Pegasus Class A Common Stock by
(ii) the fractional share of Pegasus Class A Common Stock to which such
holder would otherwise be entitled (taking into account all shares held of
record by such holder at the Effective Time).
(g) Withholding. Pegasus (or any Affiliate thereof) shall be entitled to
deduct and withhold from the consideration otherwise payable pursuant to
this Agreement to any former holder of Company Capital Stock such amounts,
if any, as Pegasus (or any Affiliate thereof) is required to deduct and
withhold with
I-14
<PAGE>
respect to the making of such payment under the Code, or any other
provision of federal, state, local or foreign tax law. To the extent that
amounts are so withheld by Pegasus, such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to the former holder
of the Company Capital Stock in respect of which such deduction and
withholding was made by Pegasus (or such Affiliate).
2.8 Stock Transfer Books. At the Effective Time, the stock transfer books
of the Company shall be closed, and there shall be no further registration of
transfers of shares of Company Capital Stock thereafter on the records of the
Company.
2.9 Dissenting Shares. Shares of Company Capital Stock which are issued
and outstanding immediately prior to the Effective Time and which are held by
persons who have properly exercised, and not withdrawn or waived, appraisal
rights with respect thereto in accordance with Section 262 of the DGCL (the
"Dissenting Shares") will not be converted into the right to receive the Merger
Consideration, and holders of such shares of Company Capital Stock will be
entitled, in lieu thereof, to receive payment of the appraised value of such
shares of Company Capital Stock in accordance with the provisions of such
Section 262 unless and until such holders fail to perfect or effectively
withdraw or lose their rights to appraisal and payment under the DGCL. If,
after the Effective Time, any such holder fails to perfect or effectively
withdraws or loses such right, such shares of Company Capital Stock will
thereupon be treated as if they had been converted at the Effective Time into
the right to receive the Merger Consideration, without any interest thereon.
The Company will give Pegasus prompt notice of any demands received by the
Company for appraisal of shares of Company Capital Stock. Prior to the
Effective Time, the Company will not, except with the prior written consent of
Pegasus make any payment with respect to, or settle or offer to settle, any
such demands.
2.10 Failure to Surrender Share Certificates. Pegasus shall be obligated
to deliver certificates evidencing the Merger Consideration and cash in lieu of
fractional shares only upon receipt of certificates representing the Company
Capital Stock converted by reason of the Merger into the Merger Consideration.
If any Shareholder fails to deliver any of its certificates representing
Company Capital Stock at the Closing, Pegasus may withhold from its delivery to
the applicable Shareholder and the Escrow Agent the corresponding portion of
the Merger Consideration until such time as the applicable share certificates
(or, in case of lost, stolen or missing share certificates, an affidavit of
loss and unsecured indemnity agreement reasonably satisfactory to Pegasus)
shall be delivered.
2.11 Closing. The closing of the transactions contemplated by this
Agreement and the Collateral Documents ("Closing") shall take place at the
offices of Drinker Biddle & Reath LLP, One Logan Square, 18th and Cherry
Streets, Philadelphia, Pennsylvania 19103, or at such other location as the
parties may agree, at 10:00 a.m., Eastern Time, on a Business Day specified by
Pegasus that may be on, but shall not be more than five Business Days after,
all conditions precedent to the Closing set forth in Articles IX and X have
been satisfied or waived, or on such other date and at such other time as the
Parties may agree, provided that all such conditions precedent have been
satisfied or waived. The date on which the Closing actually occurs is referred
to herein as the "Closing Date."
2.12 Treatment of Certain Outstanding Options and Warrants. At the
Effective Time, Pegasus will assume the Company's obligations under the Options
described in Section 3.2(d)(i) of the Company Disclosure Statement and will
replace them (upon surrender thereof by the Persons who hold them) with
warrants or options, as the case may be, to purchase (on the same terms and
conditions that are applicable to the Options) the number of shares of Pegasus
Class A Common Stock equal to the Conversion Ratio applicable to the class of
Company Capital Stock for which such Options are exercisable times the number
of shares of the relevant class of Company Capital Stock issuable upon exercise
of such Options, for an exercise price equal to the exercise price applicable
to such Options divided by the Conversion Ratio applicable to the relevant
class of Company Capital Stock. For purposes of this Section, Options
consisting of employee stock options will be replaced with options issued under
Pegasus's employee stock option plan, and other Options will be replaced with
other options or warrants to purchase Pegasus Class A Common Stock, all on the
terms provided herein.
2.13 Certain Expenses. The Shareholders shall bear the cost and expense of
all investment banking, brokerage and financial advisory services rendered to
any of the Sellers relating to the transactions
I-15
<PAGE>
contemplated by this Agreement. To that end, at the Company's option, (a) some
or all of the Shareholders shall pay all such expenses before the Closing with
funds not provided by the Company and provide Pegasus satisfactory evidence of
such payment, or (b) the number of shares of Pegasus Class A Common Stock
included in the Merger Consideration shall be reduced by the amount of such
costs and expense divided by the Market Price on the Closing Date.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Pegasus that the statements
contained in Article III are correct and complete as of the date of this
Agreement and, except as provided in Section 9.1, will be correct and complete
as of the Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout Article III, except in
the case of representations and warranties stated to be made as of the date of
this Agreement or as of another date).
3.1 Organization and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and each Subsidiary of the Company is a business organization of the
type described in Section 3.1 of the Company Disclosure Statement and is duly
organized, validly existing and in good standing under the laws of the state
identified in Section 3.1 of the Company Disclosure Statement. All of the
Company's Subsidiaries are identified in Section 3.1 of the Company Disclosure
Statement. The Company has, and each of its Subsidiaries has, all requisite
power and authority to own, lease and use its assets as they are currently
owned, leased and used and to conduct its business as it is currently
conducted. The Company is, and each of its Subsidiaries is, duly qualified or
licensed to do business in and is in good standing in each jurisdiction in
which the character of the properties owned, leased or used by it or the nature
of the activities conducted by it make such qualification necessary, all of
which are identified in Section 3.1 of the Company Disclosure Statement, except
any such jurisdiction where the failure to be so qualified or licensed would
not have a Material Adverse Effect on the Company or a material adverse effect
on the validity, binding effect or enforceability of this Agreement or the
Collateral Documents or the ability of the Company or any of the GSS Parties to
perform its obligations under this Agreement or any of the Collateral
Documents.
3.2 Capitalization.
(a) The authorized, issued and outstanding capital stock and other
ownership interests of the Company and each of its Subsidiaries (including
all options and warrants to acquire capital stock of the Company and any
Subsidiary) are fully and accurately described in Section 3.2(a) of the
Company Disclosure Statement.
(b) All of the issued and outstanding shares of Company Capital Stock,
are owned of record, and to the knowledge of the Company beneficially, by
the Persons set forth in Section 3.2(b) of the Company Disclosure
Statement, in the numbers and percentages set forth therein, and, to the
knowledge of the Company, except as set forth in Section 3.2(b) of the
Company Disclosure Statement, no other Person has any right, title or
interest, whether legal or equitable, in said shares other than equitable
distribution rights and other similar rights. The representations and
warranties in this subsection (b) will not apply at any time after the
purchase by Pegasus of Company Capital Stock pursuant to Section 8.10
insofar as such representations and warranties relate to Company Capital
Stock purchased by Pegasus pursuant to Section 8.10.
(c) All of the issued and outstanding ownership interests in each
Subsidiary of the Company are owned, beneficially and of record, by the
Persons set forth in Section 3.2(c) of the Company Disclosure Statement,
in the numbers and percentages set forth therein, and no other Person has
any right, title or interest, whether legal or equitable, in said
ownership interests (except to the extent the Shareholders' ownership of
the Company could be deemed to constitute beneficial ownership of the
Company's Subsidiaries).
(d) Section 3.2(d)(i) of the Company Disclosure Statement lists all
outstanding or authorized options, warrants, purchase rights, preemptive
rights or other contracts or commitments that could require
I-16
<PAGE>
the Company or any of its Subsidiaries to issue, sell, or otherwise cause
to become outstanding any of its capital stock or other ownership interests
(collectively "Options"). Except as described in Section 3.2(d)(ii) of the
Company Disclosure Statement, there are no authorized or outstanding stock
appreciation, phantom stock, profit participation, or similar rights with
respect to the Company or any of its Subsidiaries, and no rights described
in Section 3.2(d)(ii) of the Company Disclosure Statement will be
outstanding at the time of the Closing.
(e) All of the issued and outstanding shares of Company Capital Stock,
and all outstanding ownership interests of each of the Company's
Subsidiaries, (i) have been duly authorized and are validly issued and
outstanding, fully paid and nonassessable (with respect to Subsidiaries
that are corporations) and have been issued in compliance with applicable
securities laws and other applicable Legal Requirements, and (ii) are
subject to no Encumbrances other than under the Company Credit Agreement,
transfer restrictions under applicable securities laws or the NRTC
Distribution Agreements, transfer restrictions under agreements among
Shareholders described in Section 3.15 of the Company Disclosure
Statement, or as described in Section 3.2(e) of the Company Disclosure
Statement (all of which Encumbrances (other than Encumbrances on the
ownership interests in subsidiaries of the Company granted pursuant to the
Company Credit Agreement and other than transfer restrictions under the
NRTC Distribution Agreements and applicable securities laws) will be
released at or before the Closing). The representations and warranties in
clause (ii) of the preceding sentence will not apply at any time after the
purchase by Pegasus of Company Capital Stock pursuant to Section 8.10
insofar as such representations and warranties relate to Company Capital
Stock purchased by Pegasus pursuant to Section 8.10.
(f) This Section 3.2 does not prohibit the transfer of Company Capital
Stock, consistent with applicable law, between the date of this Agreement
and the Closing Date, provided that any Principal Company Shareholder so
transferring shares of Company Capital Stock requires its transferee to
agree in writing to be bound by this Agreement (including the covenant in
Section 7.5 to vote for the Merger). All such transfers will be reflected
in the Company's notification delivered pursuant to Section 2.7(c). If any
shares of Company Capital Stock shall be transferred before the Closing
Date by signatories to the Voting Agreement, shares of Pegasus Class A
Common Stock issued in exchange for the transferred shares shall be
treated for purposes of Section 4.1 of the Voting Agreement as Covered
Shares received by the transferor at the Closing and transferred to the
transferee thereafter, and the form of Voting Agreement executed at the
Closing shall be appropriately modified.
3.3 Authority and Validity. The Company has all requisite corporate power
to execute and deliver, to perform its obligations under, and to consummate the
transactions contemplated by, this Agreement (subject to the approval of the
Shareholders as contemplated by Section 7.5 and to receipt of any consents,
approvals, authorizations or other matters referred to in Section 7.4 hereof).
The execution and delivery by the Company of, the performance by the Company of
its obligations under, and the consummation by the Company of the transactions
contemplated by, this Agreement have been duly authorized by all requisite
action of the Company (subject to the approval of the Shareholders as
contemplated by Section 7.5). This Agreement has been duly executed and
delivered by the Company and (assuming due execution and delivery by the
Pegasus Parties) is the legal, valid, and binding obligation of the Company,
enforceable against it in accordance with its terms, except that such
enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting or relating to enforcement of
creditors' rights generally and (ii) general equitable principles. Upon the
execution and delivery of the Collateral Documents by each Person (other than
Pegasus and its Affiliates and the Escrow Agent) that is required by this
Agreement to execute, or that does execute, this Agreement or any of the
Collateral Documents (collectively, the "GSS Parties"), and assuming due
execution and delivery thereof by the Pegasus Parties and the Escrow Agent, the
Collateral Documents will be the legal, valid and binding obligations of each
of the GSS Parties, enforceable against each in accordance with their
respective terms, except that such enforcement may be subject to (i)
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting or relating to enforcement of creditors' rights generally and (ii)
general equitable principles.
3.4 No Breach or Violation. Subject to obtaining the consents, approvals,
authorizations, and orders of and making the registrations or filings with or
giving notices to Governmental Authorities and Persons
I-17
<PAGE>
identified in the exceptions to Section 3.5, the execution, delivery and
performance by the Company of this Agreement and the Collateral Documents to
which it is a party, and the consummation of the transactions contemplated
hereby and thereby in accordance with the terms and conditions hereof and
thereof, do not and will not conflict with, constitute a violation or breach
of, constitute a default or give rise to any right of termination or
acceleration of any right or obligation of the Company under, or result in the
creation or imposition of any Encumbrance upon the Company, any of its
Subsidiaries, the Assets, the Business or the Company Capital Stock by reason
of the terms of (i) the certificate of incorporation, by-laws or other charter
or organizational document of the Company or any Subsidiary of the Company,
(ii) any material contract, agreement, lease, indenture or other instrument to
which the Company or any Subsidiary of the Company is a party or by or to which
the Company, any Subsidiary of the Company or the Assets may be bound or
subject, (iii) any order, judgment, injunction, award or decree of any
arbitrator or Governmental Authority or any statute, law, rule or regulation
applicable to the Company or any Subsidiary of the Company or (iv) any Permit
of the Company or any Subsidiary of the Company, which in the case of (ii),
(iii) or (iv) above would have a Material Adverse Effect on the Company or a
material adverse effect on the validity, binding effect or enforceability of
this Agreement or the Collateral Documents or the ability of the Company or any
of the GSS Parties to perform its obligations under this Agreement or any of
the Collateral Documents.
3.5 Consents and Approvals. Except for (i) requirements under the NRTC
Distribution Agreements, the Securities Act, the Exchange Act, the HSR Act, and
the Company Credit Agreement, (ii) the requirement to make the Change of
Control Offers following the Closing, and (iii) requirements described in
Section 3.5 of the Company Disclosure Statement, no consent, approval,
authorization or order of, registration or filing with, or notice to, any
Governmental Authority or any other Person is necessary to be obtained, made or
given by the Company or any of its Subsidiaries in connection with the
execution, delivery and performance by them of this Agreement or any Collateral
Document or for the consummation by them of the transactions contemplated
hereby or thereby, except to the extent the failure to obtain any such consent,
approval, authorization or order or to make any such registration or filing
would not have a Material Adverse Effect on the Company or a material adverse
effect on the validity, binding effect or enforceability of this Agreement or
the Collateral Documents or the ability of the Company or any of the GSS
Parties to perform its obligations under this Agreement or any of the
Collateral Documents.
3.6 Title to Assets.
(a) The Company does not own any real property. Section 3.6 of the
Company Disclosure Statement includes a materially accurate and complete
description of (i) all real property leased by the Company or any of its
Subsidiaries (identifying the lessee and the lessor and describing the
term and the payment terms) and (ii) each place of business of the Company
or any of its Subsidiaries. The Company and its Subsidiaries have
exclusive, good and marketable title to the NRTC Distribution Agreements
and good and marketable title to the other material Assets, free and clear
of any and all Encumbrances, except (A) such Encumbrances on the NRTC
Distribution Agreements that will be released prior to Closing, (B)
Encumbrances arising under the Company Credit Agreement, (C) the security
interest in the interest escrow established by one of the Company
Indentures and the related escrow agreement, (D) the matters described in
Section 3.6 of the Company Disclosure Statement (all of which will have
been discharged at or before the Closing unless otherwise indicated in
Section 3.6 of the Company Disclosure Statement), (E) Permitted Liens, (F)
transfer restrictions imposed by the NRTC Distribution Agreements and
other Encumbrances on the NRTC Distribution Agreements that are not
material individually or in the aggregate, and (G) Encumbrances on
property other than the NRTC Distribution Agreements that would not have a
Material Adverse Effect on the Company or a material adverse effect on the
validity, binding effect or enforceability of this Agreement or the
Collateral Documents or the ability of the Company or any of the GSS
Parties to perform its obligations under this Agreement or any of the
Collateral Documents.
(b) Except as provided by this Agreement, and except as described in
Section 3.2 or 3.6 of the Company Disclosure Statement, no Person has any
right to acquire, directly or indirectly, any interest in any of the
Company's Subsidiaries or any material Assets, and there is no agreement
to which any Seller,
I-18
<PAGE>
any Subsidiary of the Company or any of their Affiliates is a party or is
otherwise bound relating to the direct or indirect sale of any of the NRTC
Distribution Agreements or the capital stock, other ownership interests or
any material Assets of the Company or any of its Subsidiaries.
3.7 Intellectual Property.
(a) Section 3.7 of the Company Disclosure Statement sets forth a true
and complete list of all registered patents, trademarks, copyrights and
applications therefor owned by or registered in the name of the Company or
any of its Subsidiaries, or in which the Company or any of its
Subsidiaries has any right, license or interest (the "Company Intellectual
Property Rights"). Except as set forth in Section 3.7 of the Company
Disclosure Statement, the Company is not a party to any license agreement,
either as licensor or licensee, with respect to any Company Intellectual
Property Rights. To the knowledge of the Company, the Company or one of
its subsidiaries has good and marketable title to or the right to use all
Company Intellectual Property Rights and all inventions, processes,
designs, formulae, trade secrets and know-how necessary for the operation
of the Business without the payment of any royalty or similar payment.
(b) To the knowledge of the Company, neither the Company nor any of its
Subsidiaries has in its operation of the Business infringed upon, and the
operation of the Business as currently conducted does not infringe upon,
any patents, copyrights, trade names, trademarks or service marks of third
parties, and neither the Company nor any of its Subsidiaries has received
any charge, complaint, claim, demand or notice alleging such infringement.
To the knowledge of the Company, no third party has infringed upon any
Company Intellectual Property Rights.
3.8 Compliance with Legal Requirements. Except as described in Section 3.8
of the Company Disclosure Statement, the Company and its Subsidiaries have
operated the Business in material compliance with all material Legal
Requirements and in material compliance with the NRTC Distribution Agreements
applicable to the Company and its Subsidiaries. Except as described in Section
3.8 of the Company Disclosure Statement, no action, suit, proceeding, hearing
or investigation has been commenced or, to the Sellers' knowledge, threatened,
and no charge, complaint, claim, demand or notice has been filed, against the
Company or any of its Subsidiaries alleging any failure to so comply.
3.9 Financial and Other Information.
(a) The historical financial statements (including the notes thereto)
("Company Financial Statements") contained in the Company SEC Filings or
to be contained in the Company 1999 Forms 10-K have been or will be
prepared in accordance with GAAP applied on a consistent basis throughout
the periods covered thereby and present or will present fairly the
financial condition of the Persons reported on and their results of
operations as of the dates and for the periods indicated, subject in the
case of the unaudited financial statements only to normal year-end
adjustments (none of which will be material in amount) and the omission of
footnotes.
(b) The Company SEC Filings did not, as of their filing dates, and the
Company 1999 Forms 10-K, as of their filing dates, will not, contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were or will be made, not
misleading.
(c) No written information concerning the Company, its Subsidiaries or
its Shareholders furnished to Pegasus by the Company specifically for
inclusion in the Pegasus Merger Registration Statement will at the time
provided, or as of any later time confirmed in writing by any such Person,
contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were or
will be made, not misleading.
(d) The Company Financial Model has been prepared in good faith and on
the basis of assumptions believed to be reasonable by the Company's
management.
3.10 Subsequent Events. Except as set forth in Section 3.10 of the
Company Disclosure Statement, or to the extent consented to in writing by
Pegasus, since September 30, 1999: (i) neither the Company nor any
I-19
<PAGE>
of its Subsidiaries has sold, leased, transferred or assigned any of its rights
under the NRTC Distribution Agreements, or, except in the Ordinary Course and
in compliance with the NRTC Distribution Agreements, any other material Assets;
(ii) no third party has accelerated, terminated, modified or canceled any
material agreement, contract, lease or license (or series of related
agreements, contracts, leases and licenses) relating to the Company, any of its
Subsidiaries or the Business; (iii) neither the Company nor any of its
Subsidiaries has imposed or permitted the imposition of any Encumbrance (other
than Permitted Liens) upon any of the rights of the Company or its Subsidiaries
under any of the NRTC Distribution Agreements or any material Encumbrance
(other than Permitted Liens) upon any of the other material Assets; (iv)
neither the Company nor any of its Subsidiaries has made any capital investment
in, any loan to, or any Acquisition of the securities or assets of, any other
Person (or series of related capital investments, loans or Acquisitions) other
than loans to or investments in Subsidiaries of the Company; (v) neither the
Company nor any of its Subsidiaries has delayed or postponed the payment of
accounts payable and other Liabilities outside the Ordinary Course in excess of
$100,000 (exclusive of matters being contested in good faith); (vi) neither the
Company nor any of its Subsidiaries has canceled, compromised, waived or
released any rights or claims outside the Ordinary Course involving more than
$100,000 in the aggregate; and (vii) neither the Company nor any of its
Subsidiaries have committed to any of the foregoing. Since September 30, 1999,
there has not been any other occurrence, event, incident, action, failure to
act or transaction involving the Company or any of its Subsidiaries (except
matters generally known to, and that generally affect, other NRTC members and
affiliates providing DIRECTV services) which is reasonably likely, individually
or in the aggregate, to have a Material Adverse Effect on the Company or a
material adverse effect on the validity, binding effect or enforceability of
this Agreement or the Collateral Documents or the ability of the Company or any
of the GSS Parties to perform its obligations under this Agreement or any of
the Collateral Documents.
3.11 Undisclosed Liabilities.
(a) As of the date of this Agreement, neither the Company nor any of its
Subsidiaries has any Liability, except for (i) Liabilities reflected,
accrued or reserved against in the Company Financial Statements as of
September 30, 1999 or the notes thereto or disclosed in the Company SEC
Filings, (ii) current Liabilities incurred after September 30, 1999, in
the Ordinary Course, (iii) Liabilities incurred after September 30, 1999,
under the Company Credit Agreement to finance expenditures not prohibited
by this Agreement, (iv) Liabilities incurred after September 30, 1999, in
connection with Acquisitions permitted by Section 7.3(c)(i), (v)
Liabilities disclosed in Section 3.11 of the Company Disclosure Statement
or in the Company Financial Model, and (vi) Liabilities in an aggregate
amount not exceeding $5,000,000.
(b) As of the Closing Date, neither the Company nor any of its
Subsidiaries will have any Liability, except for (i) Liabilities
reflected, accrued or reserved against in the Company Financial Statements
as of December 31, 1999, or the notes thereto or disclosed in the Company
1999 Forms 10-K, (ii) current Liabilities incurred after December 31,
1999, in the Ordinary Course, (iii) Liabilities incurred after December
31, 1999, under the Company Credit Agreement to finance expenditures not
prohibited by this Agreement, (iv) Liabilities incurred after December 31,
1999, in connection with Acquisitions permitted by Section 7.3(c)(i), (v)
Liabilities disclosed in Section 3.11 of the Company Disclosure Statement
or in the Company Financial Model, and (vi) Liabilities in an aggregate
amount not exceeding $5,000,000.
3.12 Legal Proceedings. Other than any proceedings affecting generally the
NRTC and its members and affiliates providing DIRECTV services, and except as
set forth in Section 3.12 of the Company Disclosure Statement, (i) there are no
outstanding judgments or orders against or otherwise affecting or related to
the Company, any of its Subsidiaries, the Business or the Assets; (ii) there is
no action, suit, complaint, proceeding or investigation, judicial,
administrative or otherwise, that is pending or, to any Seller's knowledge,
threatened that, if adversely determined, would result in Liabilities in an
amount exceeding $1,000,000, or that challenges the ability of the Sellers to
consummate the transactions contemplated by this Agreement or the Collateral
Documents.
3.13 Taxes. The Company has, and each of its Subsidiaries has, duly and
timely filed in proper form all Tax Returns for all Taxes required to be filed
with the appropriate Governmental Authority, except where the Liabilities of
all such failures to file could not reasonably be expected to exceed $1,000,000
in the aggregate.
I-20
<PAGE>
All Taxes due and payable by the Company and its Subsidiaries (or claimed to be
due and payable) have been paid (regardless whether Tax Returns relating to
such Taxes have been duly and timely filed or, if filed, regardless whether
such Tax Returns are deficient), except such amounts as (i) are not in the
aggregate material or (ii) are being contested diligently and in good faith and
for which there are adequate reserves in the Company Financial Statements. The
Company has furnished to Pegasus true and correct copies of all federal and
state income Tax Returns filed by it or any of its Subsidiaries in the past
five years, all of which are accurate and complete in all material respects.
Except as set forth in Section 3.13 of the Company Disclosure Statement, there
are no pending tax audits, claims or proceedings relating to the Company any of
its Subsidiaries, the Assets or the Business and income therefrom. Neither the
Company nor any of its Subsidiaries has agreed to any waiver or extension of
any statute of limitations relating to any Tax.
3.14 Employee Benefits; Employees. All Employee Benefit Plans maintained
or contributed to by the Company are set forth in Section 3.14 of the Company
Disclosure Statement. Except as set forth in Section 3.14 of the Company
Disclosure Statement and except for matters that individually and in the
aggregate would not have Liabilities in excess of $1,000,000:
(a) All such Employee Pension Benefit Plans are, and have been at all
times since their establishment, qualified for federal income tax purposes
under Code Section 401(a) and the related trusts are, and have been at all
times since their establishment, exempt from federal income tax under Code
Section 501(a). All such Employee Benefit Plans are in compliance with all
applicable provisions of ERISA, including, but not limited to, the
applicable reporting and disclosure requirements, as they relate to such
plans, and the Company is not subject to any liabilities based on past
non-compliance, if any. Pegasus and Merger Sub are not required under
ERISA, the Code, any collective bargaining agreement or any other
agreement to maintain or to continue to contribute to any Employee Benefit
Plan maintained or contributed to by the Company.
(b) The Company has made all required contributions under each Employee
Benefit Plan listed in Section 3.14 of the Company Disclosure Statement
for all periods through and including the fiscal year ended December 31,
1998, and has made all required contributions for subsequent periods or
has provided adequate accruals therefor in the Company Financial
Statements.
(c) There is not now, and has not been, any violation of the Code or
ERISA with respect to the filing of applicable reports, documents, and
notices regarding the Employee Benefit Plans maintained or contributed to
by the Company with the Secretary of Labor and the Secretary of the
Treasury or the furnishing of such documents to the participants or
beneficiaries of the Employee Benefit Plans.
I-21
<PAGE>
(d) No fiduciary or other party in interest with respect to any of the
Employee Benefit Plans maintained or contributed to by the Company has
caused any of such plans to engage in a "prohibited transaction," as
defined in ERISA Section 406.
(e) The Company has never been obligated to contribute to any
Multiemployer Plan.
(f) There has been no violation of the "continuation coverage
requirements" of "group health plans" as set forth in Code Section 4980B
and Part 6 of Subtitle B of Title I of ERISA or the "HIPAA" requirements
as set forth in Code Sections 9801 and 9802 and Part 7 of Subtitle B of
ERISA with respect to any Employee Benefit Plan maintained by the Company
to which such requirements apply.
(g) The Company does not maintain retiree life and retiree health
insurance plans which are Employee Welfare Benefit Plans providing for
continuing benefits or coverage for any employee or any beneficiary of any
employee after such employee's termination of employment (except to the
extent such continued coverage is required by Code Section 4980B and Part
6 of Subtitle B of Title I of ERISA).
(h) Prior to the Closing, the Company will not establish or create any
new Employee Benefit Plan, except with the consent of Pegasus, nor will
the Company amend or modify as to any benefit or in any other way any
existing Employee Benefit Plan, except with the consent of Pegasus.
(i) The Company does not maintain and is not obligated to contribute to
any Employee Pension Benefit Plan that is a defined benefit plan, and has
not maintained and has not been obligated to contribute to such a plan
within the last six years.
(j) "Company," as used in subsections (a) through (i) of this Section
3.14 shall include any other entity required to be aggregated with the
Company under Sections 414(b), 414(c), 414(m), or 414(o) of the Code and
the regulations thereunder.
(k) There are no collective bargaining agreements applicable to any
Persons employed by the Company or any of its Subsidiaries, and the
Company and its Subsidiaries have no duty to bargain with any labor
organization with respect to any such Person. There are not pending any
unfair labor practice charges against the Company or any of its
Subsidiaries, nor is there any demand for recognition, or any other
request or demand from a labor organization for representative status with
respect to any Person employed by the Company or any of its Subsidiaries.
(l) The Company and its Subsidiaries are in substantial compliance with
all applicable Legal Requirements respecting employment conditions and
practices, have withheld all amounts required by any applicable Legal
Requirements or Contracts to be withheld from the wages or salaries of
their employees, and are not liable for any arrears of wages or any Taxes
or penalties for failure to comply with any of the foregoing.
(m) The Company and its Subsidiaries have not engaged in any unfair
labor practice within the meaning of the National Labor Relations Act and
have not violated any Legal Requirement prohibiting discrimination on the
basis of race, color, national origin, sex, religion, age, marital status,
or handicap in their employment conditions or practices, except where such
violations would not have a Material Adverse Effect on the Company. There
is not pending or, to the best of the Company's knowledge, threatened any
discrimination complaint relating to race, color, national origin, sex,
religion, age, marital status, or handicap against the Company or any of
its Subsidiaries before any Governmental Authority.
(n) There is no existing or, to the best of the Company's knowledge,
threatened, labor strike, dispute, grievance or other labor controversy
affecting the Company or any of its Subsidiaries. There is no pending or,
to the best of the Company's knowledge, threatened representation question
respecting the employees of the Company or any of its Subsidiaries. There
is no pending or, to the best of the Company's knowledge, threatened
arbitration proceeding under any Contract.
(o) Section 3.14 of the Company Disclosure Statement identifies all
employees other than customer service representatives that have been
terminated for cause, the reasons for termination, any agreements relating
to such terminations and any litigation or proceedings relating to such
terminations.
I-22
<PAGE>
(p) Section 3.14 of the Company Disclosure Statement sets forth a true
and complete list of the names, titles and rates of compensation of all of
the Company's employees.
3.15 Contracts.
(a) Section 3.15 of the Company Disclosure Statement contains a true,
correct and complete list of (or a specific cross-reference to one or more
other sections of the Company Disclosure Statement where there is
described) the following contracts, agreements and commitments, whether
written or oral, to which the Company or any its Subsidiaries is a party
("Contracts"):
(i) each NRTC Distribution Agreement (together with the Service Area
covered by each) and any other agreement with NRTC or DirecTV, Inc. or
any of their Affiliates;
(ii) each agreement to which the Company or any of its Subsidiaries
is a party relating to the Acquisition of a DIRECTV Distribution
Business;
(iii) any agreement (or group of related agreements) relating to the
financing, lease or rental of Personal Property to the Company or any
of its Subsidiaries by any Person requiring payments in excess of
$100,000 per year;
(iv) each lease of real property to which the Company or any of its
Subsidiaries is a party, and each management, maintenance and service
agreement relating to real estate owned or leased by the Company or any
of its Subsidiaries requiring payments in excess of $50,000 per year;
(v) each form of agreement currently in effect used by the Company or
any of its Subsidiaries to provide for the maintenance or installation
of DIRECTV Systems;
(vi) any agreement (or group of related agreements) for the purchase
or sale of supplies, products or other personal property, or for the
furnishing or receipt of services (including any forms of agreement or
purchase order relating to the sale of DIRECTV Systems or the sale of
DIRECTV services) requiring payments in excess of $100,000 per year;
(vii) each form of Consumer Contract currently in effect used by the
Company and its Subsidiaries (as distinguished from their
predecessors);
(viii) any written agreement concerning a partnership or joint
venture;
(ix) any written agreement with the Shareholders (or any of them),
including agreements related to registration rights;
(x) any agreement (or group of related agreements) under which the
Company or any of its Subsidiaries has created, incurred, assumed or
guaranteed any indebtedness for borrowed money, or any capitalized
lease obligation, or under which the Company or any of its Subsidiaries
has imposed an Encumbrance (other than a Permitted Lien), the liability
on which, determined in accordance with GAAP, exceeds $200,000;
(xi) any agreement concerning confidentiality or noncompetition;
(xii) any material agreement involving any officer, director or
shareholder of the Company or any of its Subsidiaries;
(xiii) any agreement for the employment or hire of any individual on
a full-time, part-time, consulting or other basis requiring payments of
$50,000 or more per year;
(xiv) any written agreement relating to the severance or termination
of an employee that could reasonably be expected to require payment by
the Company or any Subsidiary of $50,000 or more;
(xv) each form of agreement currently in effect used by the Company
or any of its Subsidiaries relating to the services of sales
representatives, agents and other independent contractors (including
agreements relating to the maintenance or installation of DIRECTV
Systems);
I-23
<PAGE>
(xvi) any material agreement under which the Company or any of its
Subsidiaries has advanced or lent any amount to any employee or any of
the current or former directors, officers or shareholders of the
Company or any of its Affiliates (other than advances against properly
documented and properly reimbursable business expenses in the Ordinary
Course);
(xvii) any agreement relating to the sale or use of subscriber lists;
(xviii) all agreements relating to multiple dwelling units;
(xix) any agreement under which the consequences of a default or
termination could have a Material Adverse Effect on the Company or a
material adverse effect on the validity, binding effect or
enforceability of this Agreement or the Collateral Documents or the
ability of the Company or any of the GSS Parties to perform its
obligations under this Agreement or any of the Collateral Documents;
and
(xx) any other agreement (or group of related agreements) entered
into other than in the Ordinary Course the performance of which
involves payments in excess of $200,000.
(b) The Company has delivered or made available to Pegasus a correct and
complete copy of each written agreement listed in Section 3.15 of the
Company Disclosure Statement and a written summary setting forth the
material terms and conditions of each oral agreement listed therein. With
respect to each Contract, except as described in Section 3.15 of the
Company Disclosure Statement: (A) the Contract is legal, valid, binding,
enforceable and in full force and effect; (B) subject to obtaining any
consent referred to in Section 3.5 or disclosed in Section 3.5 of the
Company Disclosure Statement, the transactions contemplated by this
Agreement will not prevent the Contract from continuing to be legal,
valid, binding, enforceable and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby;
(C) neither the Company nor any of its Subsidiaries, nor, to the knowledge
of the Company, any other party thereto, is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a
breach or default, or permit termination, modification or acceleration,
under the Contract; and (D) neither the Company nor any of its
Subsidiaries, nor, to the knowledge of the Company, any other party
thereto, has repudiated any provision of the Contract.
3.16 Books and Records. The books and records of the Company and its
Subsidiaries accurately and fairly represent the Business and its results of
operations in all material respects. All Accounts Receivable and Inventory of
the Business are reflected properly on such books and records in all material
respects.
3.17 Business Information. The Company has delivered to Pegasus copies,
certified by an officer of the Company to be current and to conform to the
originals of such documents, of all Exhibits C to the NRTC Distribution
Agreements to which the Company's Subsidiaries are parties.
3.18 Insurance. Section 3.18 of the Company Disclosure Statement sets
forth the following information with respect to each insurance policy relating
to the Business (including policies providing property, casualty, liability,
directors' and officers' liability and workers' compensation coverage and bond
and surety arrangements) to which the Company or any of its Subsidiaries has
been a party, a named insured, or otherwise the beneficiary of coverage at any
time during the past three years:
(i) the name, address, and telephone number of the agent;
(ii) the name of the insurer, the name of the policyholder and the
name of each covered insured; and
(iii) the scope (including an indication of whether the coverage was
on a claims made, occurrence or other basis) and amount of coverage.
With respect to each such insurance policy: (A) the policy is in full
force and effect; (B) neither the Company, nor, to the Company's knowledge, any
other party to the policy is in breach or default (including with respect to
the payment of premiums or the giving of notices), and, to the Company's
knowledge, no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default, or
I-24
<PAGE>
permit termination, modification or acceleration, under the policy; and (C) to
the Company's knowledge, no party to the policy has repudiated any provision
thereof. The Business and the Assets have been covered since the beginning of
Business operations in scope and amount customary and reasonable for such a
business and in the case of workers' compensation coverage, in scope and amount
required by applicable Legal Requirements. Section 3.18 of the Company
Disclosure Statement describes any self-insurance arrangements affecting the
Assets or the Business. Section 3.18 of the Company Disclosure Statement also
sets forth each insurance claim (other than medical claims) in excess of
$1,000,000 made or loss incurred relating to the Business pursuant to property,
casualty, liability, workers' compensation and bond and surety policies and,
except as indicated therein, no such claim is outstanding.
3.19 Environmental Matters. Except as set forth in Section 3.19 of the
Company Disclosure Statement:
(a) The Company and its Subsidiaries have incurred no material
liabilities under any applicable Environmental Law and have not generated,
released, stored, used, treated, handled, discharged or disposed of any
Hazardous Substances at, on, under, in or about, or in any other manner
affecting, the Real Property, transported any Hazardous Substances to or
from the Real Property or discharged any Hazardous Substances from the
Real Property into any body of water, directly or indirectly, except in
material compliance with applicable Environmental Laws or except as would
not reasonably be expected to result in any material Liability. To the
knowledge of the Sellers, no other present or previous owner, tenant,
occupant or user of the Real Property or any other Person has released,
discharged or disposed of any Hazardous Substances at, on, under, in or
about the Real Property. To the knowledge of the Sellers, no release of
Hazardous Substances outside the Real Property has entered or threatens to
enter the Real Property, nor, to the knowledge of Sellers, is there any
pending or threatened claim based on Environmental Laws that arises from
any condition of the land surrounding the Real Property. No claim or
investigation based on Environmental Laws that relates to the condition of
the Real Property or any operations by the Company or any of its
Subsidiaries on it (i) has been asserted or conducted in the past or is
currently pending against or with respect to the Company and its
Subsidiaries or, to the knowledge of the Sellers, any other Person; or
(ii) to the knowledge of the Sellers, is threatened or contemplated.
(b) The Company has provided Pegasus with complete and correct copies of
(i) all studies, reports, surveys or other materials in the Company's or
any of its Subsidiary's possession relating to the presence or alleged
presence of Hazardous Substances at, on or affecting the Real Property;
(ii) all notices or other materials in the possession of the Company or
any Subsidiary of the Company that were received from any Governmental
Authority having the power to administer or enforce any Environmental Laws
relating to current or past ownership, use or operation of the Real
Property or activities at the Real Property; and (iii) all materials in
the possession of the Company or any Subsidiary of the Company relating to
any claim, allegation or action by any private third party under any
Environmental Law.
3.20 Disclosure. No representation or warranty of any Seller in this
Agreement or in the Collateral Documents and no statement in any certificate
furnished or to be furnished by any Seller pursuant to this Agreement
contained, contains or will contain on the date such agreement or certificate
was or is delivered, or on the Closing Date, any untrue statement of a material
fact, or omitted, omits or will omit on such date to state any material fact
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading. There is no fact known to any
Seller and not disclosed in this Agreement or the Company Disclosure Statement
(other than facts generally known to, and that generally affect, other NRTC
members and affiliates providing DIRECTV services) that could be reasonably
likely to have a Material Adverse Effect on the Company or a material adverse
effect on the validity, binding effect or enforceability of this Agreement or
the Collateral Documents or the ability of the Company or any of the GSS
Parties to perform its obligations under this Agreement or any of the
Collateral Documents.
3.21 Brokers or Finders. Except as disclosed in Section 3.21 of the
Company Disclosure Statement, no broker or finder has acted directly or
indirectly for the Company, any Seller or any of their Affiliates in connection
with the transactions contemplated by this Agreement, and neither the Company,
any Seller nor any of their Affiliates has incurred any obligation to pay any
brokerage or finder's fee or other commission in connection with the
transaction contemplated by this Agreement.
3.22 Certain Payments. Neither the Company, any of its Subsidiaries, any
of the Sellers, any of their respective directors or officers, nor, to the
Sellers' knowledge, any other Representative or any Affiliate of any
I-25
<PAGE>
of them has directly or indirectly, on behalf of or for the purpose of
assisting the Business, made any contribution, gift, bribe, rebate, payoff,
influence payment, kickback, or other similar payments to any Person, private
or public, regardless of form, whether in money, property or services, to
obtain favorable treatment in securing business, to pay for favorable treatment
for business secured, to obtain special concessions or for special concessions
already obtained, in violation of any Legal Requirement. The Company has not
established or maintained any material fund or asset that has not been recorded
in the Books and Records.
3.23 Subscribers. The Company has not employed any scheme or device for
the purpose of encouraging Persons residing outside the Service Areas or
Persons who would not be deemed Committed Member Residences to become
subscribers of the DIRECTV service offered by the Business.
3.24 Billing and Authorization System. The Company has not altered,
modified or manipulated the reporting system and/or the billing and
authorization system used by the NRTC (together, the "Information Systems") in
any way out of the Ordinary Course for NRTC members and affiliates generally
(or Pegasus in particular) or in violation of the NRTC Distribution Agreements,
including, without limitation, alteration, modification or manipulation of the
NRTC's and DIRECTV's collection or processing of data by the Information
Systems, the standard parameters set by the Information Systems with respect to
subscriber authorization, billing and cut-off and the standard reports
generated by the Information Systems.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
THE PRINCIPAL COMPANY SHAREHOLDERS
Each of the Principal Company Shareholders, severally and not jointly,
represents and warrants to Pegasus that with respect to itself the statements
contained in Article IV are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout Article IV, except in the case of representations and
warranties stated to be made as of the date of this Agreement or as of another
date).
4.1 Authority and Validity. Each Principal Company Shareholder has all
requisite power to execute and deliver, to perform its obligations under, and
to consummate the transactions contemplated by, this Agreement and the
Collateral Documents to which it is or is to be a party (subject to the
approval of the Shareholders as contemplated by Section 7.5 and to the receipt
of any consents, approvals, authorizations or other matters referred to in
Section 7.4). The execution and delivery by each Principal Company Shareholder
of, the performance by each Principal Company Shareholder of its obligations
under, and the consummation by each Principal Company Shareholder of the
transactions contemplated by, this Agreement and the Collateral Documents to
which it is or is to be a party have been duly authorized by all requisite
action of such Principal Company Shareholder. This Agreement has been duly
executed and delivered by each Principal Company Shareholder and, assuming due
execution and delivery thereof by all other parties thereto, is the legal,
valid, and binding obligation of such Principal Company Shareholder,
enforceable against it in accordance with its terms, except that such
enforcement may be subject to (i) bankruptcy, insolvency, reorganization,
moratorium or other similar laws affecting creditors' rights generally and (ii)
general equitable principles. Upon the execution and delivery by such Principal
Company Shareholder of the Collateral Documents to which it is or is to be a
party, and, assuming due execution and delivery thereof by all other parties
thereto, such Collateral Documents will be the legal, valid and binding
obligations of such Principal Company Shareholder, enforceable against it in
accordance with its terms, except that such enforcement may be subject to (i)
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally and (ii) general equitable principles.
4.2 Ownership. Each Principal Company Shareholder owns, beneficially and
of record, the number of shares of Company Capital Stock shown as owned by it
on Schedule 3.2(b) of the Company Disclosure Statement. Except as described in
Section 3.2(d) or 4.2 of the Company Disclosure Statement, no Person has any
right to acquire, and there are no Encumbrances on, the shares of Company
Capital Stock owned by such Principal Company Shareholder, other than transfer
restrictions under applicable securities laws or the NRTC Distribution
Agreements or under agreements or documents described in Section 3.15 or 4.2 of
the Company
I-26
<PAGE>
Disclosure Statement. All Encumbrances described in Section 4.2 of the Company
Disclosure Statement and all transfer restrictions under agreements among
Shareholders will be released at or before the Closing. The representations and
warranties in this Section 4.2 will not apply at any time after the purchase by
Pegasus of Company Capital Stock pursuant to Section 8.10 insofar as such
representations and warranties relate to Company Capital Stock purchased
pursuant to Section 8.10.
4.3 Consents and Approvals. Except for (i) requirements under the NRTC
Distribution Agreements, the Securities Act, the Exchange Act, the HSR Act, and
the Company Credit Agreement, (ii) the requirement to make the Change of
Control Offers following the Closing, and (iii) requirements described in
Section 3.5, 3.15 or 4.2 of the Company Disclosure Statement, no consent,
approval, authorization or order of, registration or filing with, or notice to,
any Governmental Authority or any other Person is necessary to be obtained,
made or given by any Principal Company Shareholder in connection with the
execution, delivery and performance by them of this Agreement or any Collateral
Document or for the consummation by them of the transactions contemplated
hereby or thereby.
4.4 Certain Information. No written information concerning any Principal
Company Shareholder or its interest in the Company furnished to Pegasus by any
Principal Company Shareholder specifically for inclusion in the Pegasus Merger
Registration Statement will at the time provided, or as of any later time
confirmed in writing by any such Person, contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
4.5 Compliance with Legal Requirements. Except as described in Section 4.5
of the Company Disclosure Statement, no action, suit, proceeding, hearing or
investigation has been commenced or overtly threatened in writing, and no
charge, complaint, demand or notice has been filed, against any Principal
Company Shareholder alleging any failure of the Company or its Subsidiaries to
comply in any material respect with any material legal requirement or to comply
in any material respect with any NRTC Distribution Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PEGASUS
Pegasus represents and warrants to the Company and the Principal Company
Shareholders that the statements contained in this Article V are correct and
complete as of the date of this Agreement and, except as provided in Section
10.1, will be correct and complete as of the Closing Date (as though made then
and as though the Closing Date were substituted for the date of this Agreement
throughout this Article V, except in the case of representations and warranties
stated to be made as of the date of this Agreement or as of another date).
5.1 Organization and Qualification. Each of Pegasus and Merger Sub is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, and each Subsidiary of Pegasus is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or formation. Pegasus has, and each Subsidiary of
Pegasus (including Merger Sub) has all requisite power and authority to own,
lease and use its assets as they are currently owned, leased and used and to
conduct its business as it is currently conducted. Pegasus is, and each of its
Subsidiaries (including Merger Sub) is, duly qualified or licensed to do
business in and is in good standing in each jurisdiction in which the character
of the properties owned, leased or used by it or the nature of the activities
conducted by it makes such qualification necessary, except any such
jurisdiction where the failure to be so qualified or licensed and in good
standing would not have a Material Adverse Effect on Pegasus or a material
adverse effect on the validity, binding effect or enforceability of this
Agreement or the Collateral Documents or the ability of the Company or any of
the Pegasus Parties to perform its obligations under this Agreement or any of
the Collateral Documents.
5.2 Capitalization. Pegasus's authorized capital stock consists of (i)
50,000,000 shares of Class A Common Stock, par value $.01 per share, of which
15,216,305 as of 12/29 shares are outstanding, (ii) 15,000,000 shares of Class
B Common Stock, par value $.01 per share, of which 4,581,900 shares are
I-27
<PAGE>
outstanding, (iii) 30,000,000 shares of Non-Voting Common Stock, par value $.01
per share, of which no shares are outstanding, and (iv) 5,000,000 shares of
preferred stock, par value $.01 per share, 143,684.2476 of which have been
designated as 12.75% Series A Cumulative Exchangeable Preferred Stock, all of
which is outstanding, and 5,707 of which have been designated as Series B
Junior Convertible Participating Preferred Stock, all of which is outstanding.
Except as described in Section 5.2 of the Pegasus Disclosure Statement, there
are no outstanding or authorized options, warrants, purchase rights,
subscription rights, conversion rights, exchange rights, preemptive rights or
other contracts or commitments that could require Pegasus to issue, sell, or
otherwise cause to become outstanding any of its capital stock. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to Pegasus. The issuance by
Pegasus of additional capital stock or other securities between the date of
this Agreement and the Closing Date shall not be deemed to cause the
representations and warranties in this Section to be untrue or breached as of
the Closing Date. The shares of Pegasus Class A Common Stock included in the
Merger Consideration, when issued in accordance with this Agreement, will have
been duly authorized, validly issued and outstanding and will be fully paid and
nonassessable.
5.3 Authority and Validity. Each Pegasus Party has all requisite power to
execute and deliver, to perform its obligations under, and to consummate the
transactions contemplated by, this Agreement and the Collateral Documents. The
execution and delivery by each Pegasus Party of, the performance by each
Pegasus Party of its respective obligations under, and the consummation by the
Pegasus Parties of the transactions contemplated by, this Agreement and the
Collateral Documents have been duly authorized by all requisite action of each
Pegasus Party (subject to the approval of Pegasus's shareholders as
contemplated by Section 8.5). This Agreement has been duly executed and
delivered by each of the Pegasus Parties and (assuming due execution and
delivery by the Sellers) is the legal, valid and binding obligation of each
Pegasus Party, enforceable against each of them in accordance with its terms.
Upon the execution and delivery by each of the Pegasus Parties and Marshall W.
Pagon of the Collateral Documents to which each of them is a party, and
assuming due execution and delivery thereof by the other parties thereto, the
Collateral Documents will be the legal, valid and binding obligations of each
such Person, as the case may be, enforceable against each of them in accordance
with their respective terms.
5.4 No Breach or Violation. Subject to obtaining the consents, approvals,
authorizations, and orders of and making the registrations or filings with or
giving notices to Governmental Authorities and Persons identified in the
exceptions to Section 5.5, the execution, delivery and performance by the
Pegasus Parties of this Agreement and the Collateral Documents to which each is
a party and the consummation of the transactions contemplated hereby and
thereby in accordance with the terms and conditions hereof and thereof, do not
and will not conflict with, constitute a violation or breach of, constitute a
default or give rise to any right of termination or acceleration of any right
or obligation of any Pegasus Party under, or result in the creation or
imposition of any Encumbrance upon the property of Pegasus or Merger Sub by
reason of the terms of (i) the certificate of incorporation, by-laws or other
charter or organizational document of any Pegasus Party, (ii) any material
contract, agreement, lease, indenture or other instrument to which any Pegasus
Party is a party or by or to which any Pegasus Party or its property may be
bound or subject, (iii) any order, judgment, injunction, award or decree of any
arbitrator or Governmental Authority or any statute, law, rule or regulation
applicable to any Pegasus Party or (iv) any Permit of Pegasus or Merger Sub,
which in the case of (ii), (iii) or (iv) above would have a Material Adverse
Effect on Pegasus or a material adverse effect on the validity, binding effect
or enforceability of this Agreement or the Collateral Documents or the ability
of any Pegasus Party to perform its obligations hereunder or thereunder.
5.5 Consents and Approvals. Except for requirements under the NRTC
Distribution Agreements, the Securities Act, the Exchange Act and the HSR Act,
no consent, approval, authorization or order of, registration or filing with,
or notice to, any Governmental Authority or any other Person is necessary to be
obtained, made or given by any Pegasus Party in connection with the execution,
delivery and performance by them of this Agreement or any Collateral Documents
or for the consummation by them of the transactions contemplated hereby or
thereby, except to the extent the failure to obtain such consent, approval,
authorization or order or to make such registration or filings or to give such
notice would not have a Material Adverse Effect on Pegasus or a material
adverse effect on the validity, binding effect or enforceability of this
Agreement or the Collateral Documents or the ability of the Company or any of
the Pegasus Parties to perform its obligations under this Agreement or any of
the Collateral Documents.
I-28
<PAGE>
5.6 Title to Assets. Pegasus and its Subsidiaries have exclusive, good and
marketable title to their material property and assets, free and clear of any
and all Encumbrances, except (i) Encumbrances arising under the Pegasus Credit
Agreement, (ii) Permitted Liens, (iii) the matters described in Section 5.6 of
the Pegasus Disclosure Statement and (iv) Encumbrances (other than in the
nature of liens and security interests) that would not have a Material Adverse
Effect on Pegasus or a material adverse effect on the validity, binding effect
or enforceability of this Agreement or the Collateral Documents or the ability
of the Company or any of the Pegasus Parties to perform its obligations under
this Agreement or any of the Collateral Documents. Except as provided by this
Agreement, and except as described in Section 5.2 or 5.6 of the Pegasus
Disclosure Statement, no Person has any right to acquire, directly or
indirectly, any interest in any of Pegasus's Subsidiaries or any substantial
portion of their respective properties or assets, and there is no agreement to
which Pegasus or any of its Subsidiaries is a party relating to the direct or
indirect sale of any substantial portion of such properties or assets or the
capital stock or other ownership interests of Pegasus or any of its
Subsidiaries or a material adverse effect on the validity, binding effect or
enforceability of this Agreement or the Collateral Documents or the ability of
the Company or any of the Pegasus Parties to perform its obligations under this
Agreement or any of the Collateral Documents.
5.7 Intellectual Property. To the best knowledge of Pegasus, neither
Pegasus nor any of its Subsidiaries has in the operation of their respective
businesses infringed upon, and the operation of such businesses as currently
conducted does not violate or infringe upon, any patents, copyrights, trade
names, trademarks or service marks of third parties, and neither Pegasus nor
any of its Subsidiaries has received any charge, complaint, claim, demand or
notice alleging any such infringement. To the knowledge of the Pegasus Parties,
no third party has infringed upon any Intellectual Property rights of Pegasus
or any of its Subsidiaries.
5.8 Compliance with Legal Requirements. Pegasus and its Subsidiaries have
operated their respective businesses in material compliance with all material
Legal Requirements and requirements of the NRTC (including NRTC's by-laws,
policies, procedures and guidelines) applicable to Pegasus and its
Subsidiaries. No action, suit, proceeding, hearing or investigation has been
commenced or, to the knowledge of the Pegasus Parties, threatened, and no
charge, complaint, claim, demand or notice has been filed, against Pegasus, any
of its Subsidiaries or any of the Principal Pegasus Shareholders alleging any
failure to so comply.
5.9 Legal Proceedings. Other than proceedings affecting the broadcast
television industry generally, the cable television industry generally or the
direct broadcast satellite industry and NRTC generally, and except as set forth
in Section 5.9 of the Pegasus Disclosure Statement, (i) there are no
outstanding judgments or orders against or otherwise affecting or related to
Pegasus, any of its Subsidiaries, or their business or assets; and (ii) there
is no action, suit, complaint, proceeding or investigation, judicial,
administrative or otherwise, that is pending or, to the best knowledge of any
Pegasus Party, threatened that, if adversely determined, could have a Material
Adverse Effect on Pegasus or a material adverse effect on the validity, binding
effect or enforceability of this Agreement or the Collateral Documents or the
ability of the Company or any of the Pegasus Parties to perform its obligations
under this Agreement or any of the Collateral Documents.
5.10 Subsequent Events. Except as set forth in Section 5.10 of the Pegasus
Disclosure Statement or to the extent consented to in writing by the Company,
since September 30, 1999: (i) neither Pegasus nor any of its Subsidiaries has
sold, leased, transferred or assigned any substantial portion of its properties
or assets except in the Ordinary Course and in compliance with the NRTC
Distribution Agreements; (ii) no third party has accelerated, terminated,
modified or canceled any material agreement, contract, lease or license (or
series of related agreements, contracts, leases and licenses) relating to
Pegasus or any of its Subsidiaries; (iii) neither Pegasus nor any of its
Subsidiaries has imposed or permitted the imposition of any Encumbrance upon
any substantial portion of its properties or assets except under the Pegasus
Credit Agreement; (iv) neither Pegasus nor any of its Subsidiaries has made any
capital investment in, any loan to, or any Acquisition of the securities or
assets of, any other Person (or series of related capital investments, loans or
Acquisitions) in excess of $25,000,000, other than in Subsidiaries of the
Company and other than Acquisitions of DIRECTV Distribution Businesses; (v)
neither Pegasus nor any of its Subsidiaries has issued any note, bond or other
debt security or created, incurred, assumed or guaranteed any indebtedness for
borrowed money or capitalized lease obligations except under the Pegasus Credit
Agreement, in connection with Acquisitions, and in connection with Pegasus's
offer to exchange its 12 1/2% Senior Notes for a like principal amount
of 12 1/2%
I-29
<PAGE>
Series B Senior Notes of Digital Television Services, Inc. and DTS Capital,
Inc.; (vi) neither Pegasus nor any of its Subsidiaries has delayed or postponed
the payment of accounts payable and other Liabilities outside the Ordinary
Course in excess of $100,000 (exclusive of matters being contested in good
faith); (vii) neither Pegasus nor any of its Subsidiaries has canceled,
compromised, waived or released any rights or claims outside the Ordinary
Course involving more than $100,000 in the aggregate; and (viii) neither
Pegasus nor any of its Subsidiaries has committed to any of the foregoing.
Since September 30, 1999, there has not been any other occurrence, event,
incident, action, failure to act or transaction involving Pegasus or any of its
Subsidiaries (except matters generally known to, and that generally affect,
other NRTC members and affiliates providing DIRECTV services or that generally
affect the broadcast television or cable television industries) which is
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on Pegasus or a material adverse effect on the validity, binding effect
or enforceability of this Agreement or the Collateral Documents or the ability
of the Company or any of the Pegasus Parties to perform its obligations under
this Agreement or any of the Collateral Documents.
5.11 Financial and Other Information.
(a) The historical financial statements (including the notes thereto)
("Pegasus Financial Statements") contained (or incorporated by reference)
in the Pegasus SEC Filings or to be contained in the Pegasus 1999 Form
10-K have been or will be prepared in accordance with GAAP applied on a
consistent basis throughout the periods covered thereby, and present or
will present fairly the financial condition of the Persons reported on and
their results of operations as of the dates and for the periods indicated,
subject in the case of the unaudited financial statements only to normal
year-end adjustments (none of which will be material in amount) and the
omission of footnotes.
(b) The Pegasus SEC Filings did not, as of their filing dates, and the
Pegasus 1999 Form 10-K will not, as of its filing date, contain (directly
or by incorporation by reference) any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein (or incorporated therein by
reference), in light of the circumstances under which they were or will be
made, not misleading.
(c) Except as provided in subsection (d), the Pegasus Merger
Registration Statement will not, as of its effective date, at the date it
is first mailed to the shareholders of Pegasus, at the time of the meeting
of shareholders of Pegasus contemplated by Section 8.5, or as of the
Closing Date, contain (directly or by incorporation by reference) any
untrue statement of a material fact or omit to state (directly or by
incorporation by reference) a material fact required to or stated therein
(or incorporated therein by reference) or necessary to make the statements
therein (or incorporated therein by reference), in light of the
circumstances under which they were made, not misleading.
(d) The representation and warranties in subsection (c) do not extend to
any information concerning the Company, any of its Subsidiaries or any of
the Principal Company Shareholders furnished by the Company or any of the
Principal Company Shareholders and contained or incorporated by reference
in the Pegasus Merger Registration Statement.
5.12 Undisclosed Liabilities.
(a) As of the date of this Agreement, neither Pegasus nor any of its
Subsidiaries has any Liability except for (i) Liabilities reflected,
accrued or reserved against in the Pegasus Financial Statements, as of
September 30, 1999, or the notes thereto, (ii) current Liabilities
incurred after September 30, 1999, in the Ordinary Course, (iii)
Liabilities incurred after September 30, 1999, under the Pegasus Credit
Agreement, (iv) Liabilities incurred after September 30, 1999, in
connection with Acquisitions, (v) Liabilities relating to Pegasus's 12 1/2%
Senior Notes referred to in Section 5.10(v), (vi) Liabilities disclosed in
Section 5.12 of the Pegasus Disclosure Statement, and (vii) Liabilities in
an aggregate amount of up to $5,000,000.
(b) As of the Closing Date, neither Pegasus nor any of its Subsidiaries
will have any Liability, except for (i) Liabilities reflected, accrued or
reserved against in the Pegasus Financial Statements as of December 31,
1999, or the notes thereto, (ii) current Liabilities incurred after
December 31, 1999 in the
I-30
<PAGE>
Ordinary Course, (iii) Liabilities incurred after December 31, 1999, under
the Pegasus Credit Agreement, (iv) Liabilities incurred after December 31,
1999, in connection with Acquisitions, (v) Liabilities disclosed in Section
5.12 of the Pegasus Disclosure Statement, and (vi) Liabilities in an
aggregate amount of up to $5,000,000.
5.13 Taxes. Pegasus has, and each of its Subsidiaries has, duly and timely
filed in proper form all Tax Returns for all Taxes required to be filed with
the appropriate Governmental Authority, except where the Adverse Consequences
of all such failures to file do not exceed $2,500,000 in the aggregate. All
Taxes due and payable by Pegasus and its Subsidiaries (or claimed to be due and
payable) have been paid (regardless whether Tax Returns relating to such Taxes
have been duly and timely filed or, if filed, regardless whether such Tax
Returns are deficient), except such amounts as (i) are not in the aggregate
material or (ii) are being contested diligently and in good faith and for which
Pegasus has adequately reserved in the Pegasus Financial Statements. All copies
of federal and state income Tax Returns furnished or to be furnished by Pegasus
to the Company are accurate and complete in all material respects. There are no
pending tax audits, claims or proceedings relating to Pegasus, any of its
Subsidiaries, their assets or their business and income therefrom. Neither
Pegasus nor any of its Subsidiaries has agreed to any waiver or extension of
any statute of limitations relating to any Tax.
5.14 Employee Benefits; Employees. All Employee Benefit Plans maintained
or contributed to by Pegasus as of the date of this Agreement are set forth in
Section 5.14 of the Pegasus Disclosure Statement. Except as set forth in
Section 5.14 of the Pegasus Disclosure Statement, and except for matters that
individually or in the aggregate would not have Adverse Consequences in excess
of $2,500,000:
(a) All such Employee Pension Benefit Plans are, and have been at all
times since their establishment, qualified for federal income tax purposes
under Code Section 401(a) and the related trusts are, and have been at all
times since their establishment, exempt from federal income tax under Code
Section 501(a). All such Employee Benefit Plans are in compliance with all
applicable provisions of ERISA, including, but not limited to, the
applicable reporting and disclosure requirements, as they relate to such
plans, and Pegasus is not subject to any liabilities based on past
non-compliance, if any.
(b) Pegasus has made all required contributions under each Employee
Benefit Plan listed in Section 5.14 of the Pegasus Disclosure Statement
for all periods through and including the fiscal year ended December 31,
1998, and has made all required contributions for subsequent periods or
has provided adequate accruals therefor in the Company Financial
Statements.
(c) There is not now, and has not been, any violation of the Code or
ERISA with respect to the filing of applicable reports, documents, and
notices regarding the Employee Benefit Plans maintained or contributed to
by Pegasus with the Secretary of Labor and the Secretary of the Treasury
or the furnishing of such documents to the participants or beneficiaries
of the Employee Benefit Plans.
(d) No fiduciary or other party in interest with respect to any of the
Employee Benefit Plans maintained or contributed to by Pegasus has caused
any of such plans to engage in a "prohibited transaction," as defined in
ERISA Section 406.
(e) Pegasus has never been obligated to contribute to any Multiemployer
Plan.
(f) There has been no violation of the "continuation coverage
requirements" of "group health plans" as set forth in Code Section 4980B
and Part 6 of Subtitle B of Title I of ERISA or the "HIPAA" requirements
as set forth in Code Section 9801 and 9802 and Part 7 of Subtitle B of
ERISA with respect to any Employee Benefit Plan maintained by Pegasus to
which such requirements apply.
(g) Pegasus does not maintain retiree life and retiree health insurance
plans which are Employee Welfare Benefit Plans providing for continuing
benefits or coverage for any employee or any beneficiary of any employee
after such employee's termination of employment (except to the extent such
continued coverage is required by Code Section 4980B and Part 6 of
Subtitle B of Title I of ERISA).
(h) Pegasus does not maintain and is not obligated to contribute to any
Employee Pension Benefit Plan that is a defined benefit plan, and has not
maintained and has not been obligated to contribute to such a plan within
the last six years.
I-31
<PAGE>
(i) "Pegasus," as used in subsections (a) through (h) of this Section
5.14 shall include any other entity required to be aggregated with Pegasus
under Sections 414(b), 414(c), 414(m), or 414(o) of the Code and the
regulations thereunder.
(j) There are no collective bargaining agreements applicable to any
Persons employed by Pegasus or any of its Subsidiaries, and Pegasus and
its Subsidiaries have no duty to bargain with any labor organization with
respect to any such Person. There are not pending any unfair labor
practice charges against Pegasus or any of its Subsidiaries, nor is there
any demand for recognition, or any other request or demand from a labor
organization for representative status with respect to any Person employed
by Pegasus or any of its Subsidiaries.
(k) Pegasus and its Subsidiaries are in substantial compliance with all
applicable Legal Requirements respecting employment conditions and
practices, have withheld all amounts required by any applicable Legal
Requirements or Contracts to be withheld from the wages or salaries of
their employees, and are not liable for any arrears of wages or any Taxes
or penalties for failure to comply with any of the foregoing.
(l) Pegasus and its Subsidiaries have not engaged in any unfair labor
practice within the meaning of the National Labor Relations Act and have
not violated any Legal Requirement prohibiting discrimination on the basis
of race, color, national origin, sex, religion, age, marital status, or
handicap in their employment conditions or practices, except where such
violations would not have a Material Adverse Effect on Pegasus. There is
not pending or, to the best knowledge of Pegasus, threatened any
discrimination complaint relating to race, color, national origin, sex,
religion, age, marital status, or handicap against Pegasus or any of its
Subsidiaries before any Governmental Authority.
(m) There is no existing or, to the best knowledge of Pegasus,
threatened, labor strike, dispute, grievance or other labor controversy
affecting Pegasus or any of its Subsidiaries. There is no pending or, to
the best knowledge of Pegasus, threatened representation question
respecting the employees of Pegasus or any of its Subsidiaries. There is
no pending or, to the best knowledge of Pegasus, threatened arbitration
proceeding under any Contract.
5.15 Contracts. Section 5.15 of the Pegasus Disclosure Statement contains
a true, correct and complete list as of the date hereof of (or a specific
cross-reference to one or more other sections of the Pegasus Disclosure
Statement where there is described) (i) each NRTC Distribution Agreement
(together with the Service Area covered by each) and any other agreement with
NRTC or DirecTV, Inc. or any of their Affiliates to which Pegasus or any of its
Subsidiaries is a party, (ii) a description of any agreement pursuant to which
Pegasus or any of its Subsidiaries acquired any portion of their DIRECTV
Distribution Business (other than rights acquired directly from the NRTC), and
(iii) any other agreement entered into other than in the Ordinary Course the
performance of which involves consideration in excess of $1,000,000.
Pegasus has made available to the Company the opportunity to inspect and
copy a correct and complete copy of each agreement referred to in this Section
5.15. With respect to each such agreement: except as included in Section 5.15
of the Pegasus Disclosure Statement (A) the agreement is legal, valid, binding,
enforceable and in full force and effect; (B) subject to obtaining any consent
referred to in Section 5.5 or disclosed in Section 5.5 of the Pegasus
Disclosure Statement, the agreement will continue to be legal, valid, binding,
enforceable and in full force and effect on identical terms following the
consummation of the transactions contemplated hereby; (C) neither Pegasus nor
any of its Subsidiaries, nor to the best knowledge of Pegasus, any other party
thereto, is in breach or default, and no event has occurred which with notice
or lapse of time would constitute a breach or default, or permit termination,
modification or acceleration, under the agreement; and (D) neither Pegasus nor
any of its Subsidiaries, nor to the best knowledge of Pegasus, any other party
thereto, has repudiated any provision of the agreement.
5.16 Business Information. Section 5.16 of the Pegasus Disclosure
Statement sets forth a materially true and accurate description of the
following information as of the date set forth therein (based on Exhibits C to
the NRTC Distribution Agreements to which Pegasus's Subsidiaries are parties):
(i) the approximate number of Committed Member Residences in each Service Area;
(ii) the approximate number of Committed Member Residences in each Service Area
that is cabled; and (iii) the approximate number of Committed Member Residences
in each Service Area that is uncabled.
I-32
<PAGE>
5.17 Disclosure. No representation or warranty of any Pegasus Party in
this Agreement or in the Collateral Documents and no statement in any
certificate furnished or to be furnished by any Pegasus Party pursuant to this
Agreement or the Collateral Documents, contained, contains or will contain on
the date such agreement or certificate was or is delivered, any untrue
statement of a material fact, or omitted, omits or will omit on such date to
state any material fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not misleading; nor will
any such representation or warranty or statement (to the extent it is required
by Section 10.1 to be accurate at the Closing Date) contain on the Closing Date
any untrue statement of a material fact or omit on the Closing Date to state
any material fact necessary in order to make the statements made, in light of
the circumstances under which they were made, not misleading. There is no fact
known to any Pegasus Party and not disclosed in this Agreement or the Pegasus
Disclosure Statement (other than facts generally known to, and that generally
affect, NRTC members and affiliates providing DIRECTV services or Persons in
the broadcast television or cable television industry) that could reasonably be
expected to have a Material Adverse Effect on Pegasus or a material adverse
effect on the validity, binding effect or enforceability of this Agreement or
the Collateral Documents or the ability of the Company or any of the Pegasus
Parties to perform its obligations under this Agreement or any of the
Collateral Documents.
5.18 Brokers or Finders. Except as disclosed in Section 5.18 of the
Pegasus Disclosure Statement, no broker or finder has acted directly or
indirectly for any of the Pegasus Parties in connection with the transactions
contemplated by this Agreement, and none of the Pegasus Parties has incurred
any obligation to pay any brokerage or finder's fee or other commission in
connection therewith.
5.19 Certain Payments. Neither Pegasus, any of its Subsidiaries, any of
their Affiliates nor the Representatives of any of them has directly or
indirectly, on behalf of or for the purpose of assisting their business, made
any contribution, gift, bribe, rebate, payoff, influence payment, kickback, or
other similar payments to any Person, private or public, regardless of form,
whether in money, property or services, to obtain favorable treatment in
securing business, to pay for favorable treatment for business secured, to
obtain special concessions or for special concessions already obtained, in
violation of any Legal Requirement, nor has any such Person established or
maintained any fund or asset that has not been recorded in its books and
records.
5.20 Subscribers. Pegasus has not employed any scheme or device for the
purpose of encouraging Persons residing outside the Service Areas or Persons
who would not be deemed Committed Member Residences to become subscribers of
the DIRECTV service offered by Pegasus and its Subsidiaries.
5.21 Favorable Business Relationships. To the best knowledge of Pegasus,
there are no favorable business relationships relating to the business of
Pegasus and its Subsidiaries with lessors, licensors, subscribers, suppliers or
other business associates of Pegasus or any of its Subsidiaries which will
terminate after Closing.
5.22 Securities Matters. Pegasus has filed all forms, reports, statements
and other documents required to be filed with the Commission, and has
heretofore made the Pegasus SEC Filings available to the Company, in the form
filed with the Commission, together with any amendments thereto. As of their
respective filing dates the Pegasus SEC Filings (i) complied as to form in all
material respects with the requirements of the Exchange Act and (ii) did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
5.23 FCC Matters. Pegasus and its Subsidiaries hold all licenses,
authorizations and permits (the "FCC Licenses") from the Federal Communications
Commission (the "FCC") necessary for the operation of the broadcast television
stations (the "Stations") operated by Pegasus and its Subsidiaries, except to
the extent the absence thereof would not have a Material Adverse Effect on
Pegasus, and except as disclosed in Section 5.23 of the Pegasus Disclosure
Statement. Each of the FCC Licenses is in full force and effect, and no
material default by Pegasus or any of its Subsidiaries has occurred and is
continuing thereunder. As of the date hereof, except as limited by the
provisions of the Communications Act of 1934, as amended, and the FCC's rules
and regulations and as otherwise specified on the face of any FCC License, none
of the FCC Licenses is subject to
I-33
<PAGE>
any restriction or condition that would limit in any material respect the
operation of the business of Pegasus and its Subsidiaries as it is now
conducted. There is not, as of the date hereof, pending or, to the knowledge of
Pegasus, threatened any action by or before the FCC to revoke, cancel, rescind
or modify (including a reduction in coverage area) any of the FCC Licenses
(other than proceedings to amend FCC rules of general applicability) or refuse
to renew the FCC Licenses, and there is not now issued or outstanding, pending
or, to the knowledge of Pegasus threatened by or before the FCC, any order to
show cause, notice of violation, notice of apparent liability, or notice of
forfeiture or complaint against Pegasus or any of its Subsidiaries with respect
to any of the FCC Licenses. Pegasus has no reason to believe that any of the
FCC licenses will be revoked or will not be renewed in the ordinary course.
5.24 Environmental Matters. Except as set forth in Section 5.24 of the
Pegasus Disclosure Statement:
(a) Pegasus and its Subsidiaries have incurred no material liabilities
under any applicable Environmental Law and have not generated, released,
stored, used, treated, handled, discharged or disposed of any Hazardous
Substances at, on, under, in or about, or in any other manner affecting,
the Pegasus Real Property, transported any Hazardous Substances to or from
any real property owned or leased by Pegasus (the "Pegasus Real Property")
or discharged any Hazardous Substances from the Pegasus Real Property into
any body of water, directly or indirectly, except in material compliance
with applicable Environmental Laws or except as would not reasonably be
expected to result in any material Liability. To the knowledge of the
Pegasus Parties, no other present or previous owner, tenant, occupant or
user of the Pegasus Real Property or any other Person has released,
discharged or disposed of any Hazardous Substances at, on, under, in or
about the Pegasus Real Property. To the knowledge of the Pegasus Parties,
no release of Hazardous Substances outside the Pegasus Real Property has
entered or threatens to enter the Pegasus Real Property, nor is there any
pending or threatened claim based on Environmental Laws that arises from
any condition of the land surrounding the Pegasus Real Property. No claim
or investigation based on Environmental Laws that relates to the condition
of the Pegasus Real Property or any operations by Pegasus or any of its
Subsidiaries on it (i) has been asserted or conducted in the past or is
currently pending against or with respect to Pegasus and its Subsidiaries
or, to the best knowledge of the Sellers, any other Person; or (ii) to the
knowledge of the Pegasus Parties, is threatened or contemplated.
(b) Pegasus has provided the Company with complete and correct copies of
(i) all studies, reports, surveys or other materials in the Pegasus's or
any of its Subsidiary's possession relating to the presence or alleged
presence of Hazardous Substances at, on or affecting the Pegasus Real
Property; (ii) all notices or other materials in the possession of Pegasus
or any Subsidiary of Pegasus that were received from any Governmental
Authority having the power to administer or enforce any Environmental Laws
relating to current or past ownership, use or operation of the Pegasus
Real Property or activities at the Pegasus Real Property; and (iii) all
materials in the possession of Pegasus or any Subsidiary of Pegasus
relating to any claim, allegation or action by any private third party
under any Environmental Law.
5.25 Billing and Authorization System. Pegasus has not altered, modified
or the Information Systems in any way out of the Ordinary Course for NRTC
members and affiliates generally (or the Company in particular) or in violation
of the NRTC Distribution Agreements, including, without limitation, alteration,
modification or manipulation of the NRTC's and DIRECTV's collection or
processing of data by the Information Systems, the standard parameters set by
the Information Systems with respect to subscriber authorization, billing and
cut-off and the standard reports generated by the Information Systems.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF MERGER SUB
Each of Pegasus and Merger Sub, severally and jointly, represents and
warrants to the Company that the statements contained in Article VI are correct
and complete as of the date of this Agreement and, except as provided in
Section 10.1, will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout Article VI), except in the case of representations and
warranties stated to be made as of the date of this Agreement or as of another
date.
I-34
<PAGE>
6.1 Organization and Qualification. Merger Sub is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. Merger Sub was formed solely for the purpose
of engaging in the transactions contemplated by this Agreement. As of the date
of this Agreement, except for obligations or liabilities incurred in connection
with its incorporation or organization and the transactions contemplated by
this Agreement, Merger Sub has no assets (other than not more than $1,000 in
cash) and has not incurred, directly or indirectly, any obligations or
liabilities or engaged in any business activities of any type or kind
whatsoever or entered into any agreements or arrangements with any person.
6.2 Certificate of Incorporation and Bylaws. Merger Sub has heretofore
made available to the Company a complete and correct copy of the certificate of
incorporation and the bylaws of Merger Sub, each as amended to date. Such
certificate of incorporation and bylaws are in full force and effect. Merger
Sub is not in violation of any of the provisions of its certificate of
incorporation or bylaws.
6.3 Authority. Merger Sub has the necessary corporate power and authority
to enter into this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by Merger Sub and the consummation by Merger Sub of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of
Merger Sub are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by Merger Sub and, assuming the due authorization, execution and
delivery by the Company and the Principal Company Shareholders, constitutes a
legal, valid and binding obligation of Merger Sub, enforceable in accordance
with its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws of general
applicability relating to or affecting creditors' rights generally and by the
application of general principles of equity.
I-35
<PAGE>
6.4 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Merger Sub do not,
and the performance by Merger Sub of its obligations under this Agreement
will not (i) conflict with or violate the certificate of incorporation or
bylaws of Merger Sub, (ii) conflict with or violate any law, statute
ordinance, rule, regulation, order, judgment or decree applicable to
Merger Sub or by which any of its properties is bound or affected, or
(iii) result in any breach of or constitute a default (or an event which
with notice or lapse of time or both would become a default) under, or
give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of any Encumbrance on any of
the properties or assets of Merger Sub pursuant to, any note, bond,
mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Merger Sub is a party
or by which Merger Sub or any of its properties or assets is bound or
affected, except, in the case of clauses (ii) and (iii) above for any such
conflicts, violations, breaches, defaults or other alterations or
occurrences that would not prevent or delay consummation of the Merger in
any material respect, or otherwise prevent Merger Sub from performing its
obligations under this Agreement in any material respect.
(b) The execution and delivery of this Agreement by Merger Sub does
not, and the performance of this Agreement by Merger Sub will not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Entity, except (i) for (A) applicable
requirements, if any, of the Securities Act, the Exchange Act, state
takeover laws, exchanges on which Pegasus's securities are traded, the HSR
Act and the Communications Act, (B) filings and recordation of appropriate
merger documents as required by Delaware Law and (ii) where failure to
obtain such consents, approvals, authorizations or permits, or to make
such filings or notifications, would not prevent or delay consummation of
the Merger in any material respect.
6.5 Vote Required. The affirmative vote of Pegasus, the sole stockholder
of Merger Sub, is the only vote of the holder of any class or series of Merger
Sub capital stock necessary to approve any of the transactions contemplated
hereby.
ARTICLE VII
PRE-CLOSING COVENANTS OF THE SELLERS
Between the date of this Agreement and the Closing Date:
7.1 Additional Information. The Company shall provide to Pegasus and its
Representatives such financial, operating and other documents, data and
information relating to the Company and its Subsidiaries, the Business and the
Assets and Liabilities of the Company and its Subsidiaries, including pending
and completed Acquisitions of DIRECTV Distribution Businesses, as Pegasus or
its Representatives may reasonably request. Such access shall include the right
of Pegasus and its Representatives to inspect any records, reports and material
correspondence of NRTC and DIRECTV in the possession of the Company or any
Subsidiary and, provided that a Company Representative is present and does not
reasonably object to such discussion, to discuss such records, reports and
correspondence with NRTC and DIRECTV, and the Company shall take all action
necessary to facilitate the foregoing. In addition, the Company shall take all
action necessary to enable Pegasus and its Representatives (including
PricewaterhouseCoopers LLP) to review, inspect and audit the Assets, Business
and Liabilities of the Company and its Subsidiaries and discuss them with the
Company's officers, employees, independent accountants, and counsel.
Notwithstanding any investigation that Pegasus may conduct of the Company and
its Subsidiaries, the Business, the Assets and Liabilities, subject to Section
13.7, the Pegasus Parties may fully rely on the Sellers' warranties, covenants
and indemnities set forth in this Agreement, the Collateral Documents and any
documents or certificates delivered hereunder and thereunder, which will not be
waived or affected by or as a result of such investigation.
7.2 Exclusivity. Neither any Seller, nor any Affiliate or Representative
of any Seller shall directly or indirectly, solicit or initiate any
discussions, submissions of proposals or offers or negotiations with, or,
subject to any fiduciary obligations under applicable law after taking into
account the advice of counsel with respect thereto, participate in any
negotiations or discussions with, or provide any information or data of any
nature
I-36
<PAGE>
whatsoever, to, or otherwise cooperate in any other way with, or assist or
participate in, facilitate or encourage any effort or attempt by, any Person,
other than Pegasus and its shareholders, employees, Representatives, agents and
Affiliates, concerning any merger, consolidation, sale of substantial assets,
sale of shares of capital stock or other equity securities or similar
transaction involving the Company or any of its Subsidiaries (all such
transactions being referred to herein as "Company Alternative Transactions"
provided, however, that the term "Company Alternative Transactions" shall not
be deemed to include, and the foregoing shall not prohibit acquisitions
permitted under Section 7.3(c)(i). The Sellers shall immediately notify Pegasus
if any proposal, offer, inquiry or other contact is received by, any
information is requested from, or any discussions or negotiations are sought to
be initiated or continued with, any Seller in respect of a Company Alternative
Transaction, and shall, in any such notice to Pegasus, indicate the identity of
the offeror.
7.3 Continuity and Maintenance of Operations.
(a) The Company shall, and shall cause its Subsidiaries to: (i) comply
in all material respects with all Legal Requirements and requirements of
the NRTC Distribution Agreements applicable to the Company and its
Subsidiaries relating to the Business; (ii) fulfill in all material
respects all of its obligations under and use commercially reasonable
efforts to maintain in full force and effect all Contracts (other than
those that expire by their terms or as otherwise consented to by Pegasus),
including the NRTC Distribution Agreements, and shall not, without the
prior written consent of Pegasus, seek to materially alter, modify or
amend any of the foregoing in a manner adverse to the Company or its
Subsidiaries (other than those Contracts that expressly provide that they
will be amended or modified upon the happening of specified contingencies,
and other than amendments or modifications that are consented to by
Pegasus); (iii) use its commercially reasonable efforts to promote the
financial success of the Business and promptly notify Pegasus of any
material adverse change in the condition (financial or otherwise) of the
Business; and (iv) use its commercially reasonable efforts to promote,
develop and preserve its relationships with its present employees as well
as the goodwill of its customers and promptly notify Pegasus of any
material adverse change in such relationships. Without limiting the
generality of the foregoing, the Company shall, and shall cause its
Subsidiaries to maintain the Assets in materially good order, condition
and repair (except as otherwise contemplated by the Company Financial
Model), maintain insurance relating to the Business in all material
respects as in effect on the date of this Agreement, operate the Business
(including, without limitation, billing, collection and subscriber
matters) in the Ordinary Course (except as otherwise contemplated by the
Company Financial Model) and in material compliance with the NRTC
Distribution Agreements, use its commercially reasonable efforts to
maintain inventories of DIRECTV Systems and supplies at reasonable levels,
and keep and maintain all of the books and records in the Ordinary Course.
Other than in the Ordinary Course, the Company and its Subsidiaries shall
not pay or credit in any way any Accounts Receivable prior to the Closing
Date, and shall not permit any of its Representatives to do so either. The
Company shall, and shall cause its Subsidiaries to, enforce procedures for
disconnection and/or discontinuance of service to subscribers (i) whose
accounts are delinquent, (ii) who do not pay for core DIRECTV programming
packages, or (iii) who are not Committed Member Residences, all in the
Ordinary Course and in accordance with the NRTC Distribution Agreements.
(b) The Company shall not, and shall cause its Subsidiaries not to,
without the prior written consent of Pegasus: (i) deviate in any material
respect from DIRECTV national programming packages or rates except as
described in Section 7.3 of the Company Disclosure Statement; (ii) engage
in marketing promotions other than in the Ordinary Course and in
accordance with the NRTC Distribution Agreements; or (iii) sell, lease,
transfer, convey or assign any material Assets other than in the Ordinary
Course and in accordance with the NRTC Distribution Agreements (or enter
into any contract to do any of the foregoing) or permit the creation of
any Encumbrance on any of the rights of the Company and its Subsidiaries
under the NRTC Distribution Agreements, or any material Encumbrance on any
of the other Assets except Permitted Liens or Liens under the Company
Credit Agreement, the interest escrow established under one of the Company
Indentures and the related escrow agreement, as disclosed in Section 3.6
of the Company Disclosure Statement, or as otherwise contemplated by this
Agreement.
(c) Unless the Company shall have obtained the prior written consent of
Pegasus, the Company shall not, and shall cause its Subsidiaries not to:
I-37
<PAGE>
(i) engage in any Acquisition unless (A) the Acquisition is of a
DIRECTV Distribution Business; (B) the Acquisition is funded solely out
of the Company's cash on hand as of the date hereof, borrowings under
the Company Credit Agreement, debt incurred to the Sellers, and equity
contributions from the Company's shareholders; (C) on a pro forma
basis, after giving effect to the Acquisition and any debt incurred in
connection therewith, the Company would be in compliance with the
Company Credit Agreement (including any amendments thereto permitted
hereby) and the Company Indentures, and the Company shall have
furnished Pegasus with satisfactory evidence to that effect; (D) on a
projected basis, after giving effect to the Acquisition and any debt
incurred in connection therewith, the Company's cash resources
(including available credit under the Company Credit Agreement) will be
sufficient to satisfy its future cash requirements as reflected in the
Company Financial Model, as updated to reflect such proposed
Acquisition, including, without limitation, to fund Acquisitions of
DIRECTV Distribution Businesses that have been completed or are pending
at the time of the Acquisition and to fund operating expenses, working
capital, debt service and capital expenditures (other than the Change
of Control Offers);
(ii) amend either of the Company Indentures;
(iii) amend the Company Credit Agreement so as to (A) require any
payment of principal before it is payable under the Company Credit
Agreement as now in effect, (B) decrease the lenders' aggregate
commitments under the Company Credit Agreement as now in effect or (C)
prevent the Company and its Subsidiaries to continue business
operations as reflected in the Company Financial Model.
(iv) declare or pay any dividends or make any other distributions to
the Shareholders;
(v) redeem or repurchase any stock (other than stock of employees in
connection with termination of their employment on terms consistent
with the terms of any employment agreement described in Section 3.15 of
the Company Disclosure Statement);
(vi) issue additional Options or any stock appreciation, phantom
stock, profit participation or similar rights;
(vii) incur any material debt (except in connection with Acquisitions
permitted by paragraph (i), borrowings under the Company Credit
Agreement to finance expenditures not prohibited by this Agreement, and
other obligations incurred in the Ordinary Course); or
(viii) make any loans other than in the Ordinary Course.
(d) No Seller shall take or omit to take any action that would cause any
of them to be in breach of any representations, warranties or covenants
made by them in this Agreement or the Collateral Documents or that would,
if such action had been taken or omitted on or before the date of this
Agreement, have been required to be disclosed in Section 3.11 of the
Company Disclosure Statement.
7.4 Consents and Approvals.
(a) As soon as practicable after execution of this Agreement, each
Seller shall use commercially reasonable efforts to obtain any necessary
consent, approval, authorization or order of, make any registration or
filing with or give any notice to, any Governmental Authority or Person as
is required to be obtained, made or given by such Seller to consummate the
transactions contemplated by this Agreement and the Collateral Documents,
including without limitation any authorizations, consents, approvals,
actions, filings or notices set forth in Section 3.5 of this Agreement or
Section 3.5 of the Company Disclosure Statement (other than consents
required pursuant to indebtedness of the Company incurred in the
Acquisition of a DIRECTV Distribution Business where such indebtedness is
secured in full by a letter of credit issued pursuant to the Company
Credit Agreement, provided that the completion of the Merger in the
absence of such consents will not result in a Default or Event of Default
under and as defined in the Company Credit Agreement).
(b) The Sellers shall cooperate with Pegasus in providing such
information and reasonable assistance as may be required in connection
with the obligations of the Pegasus Parties under Section 8.4(a).
I-38
<PAGE>
7.5 Adoption by Shareholders. The Company shall use its best efforts to
secure the vote or consent of the Shareholders required by the DGCL and the
Company's certificate of incorporation and bylaws to approve and adopt this
Agreement and the Merger, and the board of directors of the Company shall
recommend to the Shareholders such approval and adoption. Unless the Company is
permitted to and elects to obtain shareholder approval by written consent, the
Company shall take all steps necessary to duly call, give notice of, convene
and hold a meeting of the Shareholders to be held as soon as is reasonably
practicable after the effectiveness and mailing of the Pegasus Merger
Registration Statement for the purpose of voting upon the approval of this
Agreement and the Merger. The Company will furnish to each Shareholder a notice
of its rights to dissent from the Merger under Section 262 of the DGCL and to
demand an appraisal of its shares of Company Capital Stock and shall provide
Pegasus with a copy of such notice prior to the Closing Date. Each of the
Principal Company Shareholders (i) hereby waives its dissenters' appraisal
rights under Section 262 of the DGCL and (ii) shall vote all of its shares of
Company Capital Stock, or otherwise give its consent, to approve this Agreement
and the Merger.
7.6 Securities Filings; Financial Information. The Company shall file the
Company 1999 Forms 10-K with the Commission at or before the date they are due
and shall simultaneously furnish Pegasus with a copy thereof. The Sellers
shall, promptly after execution of this Agreement and from time to time
thereafter, provide such information and documents to Pegasus and its
Affiliates concerning the Company, its Subsidiaries and the Principal Company
Shareholders as may be required or appropriate for inclusion in the Pegasus
Merger Registration Statement and any other filing, notification or report made
by Pegasus or any Affiliate of Pegasus under the Securities Act, the Exchange
Act or any state securities law; shall cause their respective counsel and
independent accountants to cooperate with Pegasus, its Affiliates and their
investment bankers, counsel and independent accountants in the preparation of
such filings, notifications and reports; and shall use their best efforts to
obtain consents and "comfort letters" from such accountants as required in
connection with such filings, notifications and reports. The Sellers represent
and warrant to Pegasus that no information or document provided by any Seller
for inclusion in any filing, notification or report made by Pegasus or any
Affiliate under the Securities Act or the Exchange Act will contain any untrue
statement of material fact or omit to state any material fact necessary in
order to make the statements made therein, in light of the circumstances under
which they are made, not misleading.
7.7 Notification of Certain Matters. The Company shall promptly provide to
Pegasus copies of any material notices from or correspondence from and to the
NRTC or DIRECTV or any Affiliates of DIRECTV, to the extent such materials are
in the Company's possession. The Company shall promptly notify Pegasus of any
fact, event, circumstance or action known to it that is reasonably likely to
cause any Seller to be unable to perform any of its covenants contained herein
or any condition precedent in Article IX not to be satisfied, or that, if known
on the date of this Agreement, would have been required to be disclosed to
Pegasus pursuant to this Agreement or the existence or occurrence of which
would cause any of the Sellers' representations or warranties under this
Agreement not to be correct and/or complete. The Sellers shall give prompt
written notice to Pegasus of any adverse development causing a breach of any of
the representations and warranties in Article III or IV. However, except as
provided in Section 7.8 or waived pursuant to Section 13.7, no disclosure
pursuant to this Section, shall be deemed to amend or supplement this Agreement
or to prevent or cure any misrepresentation, breach of warranty, or breach of
covenant by the Sellers.
7.8 Supplements to Company Disclosure Statement. The Company shall, from
time to time prior to Closing, supplement the Company Disclosure Statement with
additional information that, if existing or known to it on the date of this
Agreement, would have been required to be included therein. For purposes of
determining the satisfaction of any of the conditions to the obligations of the
Pegasus Parties in Article IX, the Company Disclosure Statement shall be deemed
to include only (a) the information contained therein on the date of this
Agreement and (b) information added to the Company Disclosure Statement by
written supplements delivered prior to Closing by the Sellers that (i) are
accepted in writing by Pegasus, or (ii) reflect actions expressly permitted by
this Agreement to be taken prior to Closing.
7.9 Employee Matters. Not later than ten Business Days prior to the
Closing Date, the Company shall, or shall cause the sponsor of the 401(k)
Qualified Retirement Plan Sponsored by Golden Sky Systems, Inc. and
Administered through Principal Life Insurance Company (the "401(k) Plan") to,
take the following
I-39
<PAGE>
actions: (i) adopt resolutions, or take such other action as required by the
401(k) Plan, to (A) terminate the 401(k) Plan effective as of the Closing Date,
subject to receipt of a ruling from the District Director of Internal Revenue
that the termination of the 401(k) Plan does not adversely affect the tax
qualified status of the 401(k) Plan, and (B) cease contributions under the
401(k) Plan effective as of the Closing Date; and (ii) file Internal Revenue
Service Form 5310 (Application for Determination for Terminating Plan) with
respect to the 401(k) Plan termination with the District Director of Internal
Revenue, such Form fully disclosing the corporate transaction contemplated by
this Agreement and the status of 401(k) Plan participants after the
transaction. Such resolutions (or other action required by the 401(k) Plan) and
Form 5310 shall be in a form satisfactory to Pegasus. To the extent a
distribution from the 401(k) Plan is an eligible rollover distribution (as
defined in Section 402(c)(4) of the Code), Pegasus shall permit the direct
rollover of such distribution to the Pegasus Communications Savings Plan
provided that the individual requesting the rollover contribution is a
participant in the Pegasus Communications Savings Plan at the time of such
rollover, and further provided that the rollover contribution is in cash and/or
other property acceptable to the trustee of the Pegasus Communications Savings
Plan.
7.10 1999 Company Financial Statements. The Company will use its
commercially reasonable efforts to deliver to Pegasus not later than February
14, 2000, its audited financial statements as of and for the year ended
December 31, 1999, accompanied by the report thereon of KPMG LLP. The delivery
of such audited financial statements shall constitute a representation and
warranty that such financial statements (including the notes thereto) have been
prepared in accordance with GAAP on a consistent basis with past practice and
that such financial statements present fairly the financial condition of the
Company and its Subsidiaries and the results of their operations as of December
31, 1999, and for the year then ended.
7.11 1999 Tax Returns. The Company will deliver to Pegasus at or before
the Closing Date drafts of Tax Returns for the Company and its Subsidiaries for
the period ended December 31, 1999. Such draft Tax Returns will be accurate and
complete in all material respects.
7.12 Indemnity under Prior Company Acquisitions. If reasonably requested
by Pegasus, the Company will assert claims for indemnification (that would
expire if not asserted before the Closing Date) under, and in accordance with,
agreements under which it has made Acquisitions of DIRECTV Distribution
Businesses, provided that in the Company's judgment a reasonable basis for such
claim exists.
7.13 Tax Certificate. The Sellers shall take no action that would preclude
the Company from delivering at the Closing a tax certificate in the form of
Exhibit 7.
7.14 NRTC Litigation Expenses. After the completion of Pegasus's purchase
of Company Capital Stock pursuant to Section 8.10, the Company will establish a
committee of the board of directors of the Company consisting of William
Collatos, Eric Torgerson, Robert Benbow and Marshall W. Pagon, which shall
approve an expense budget for the existing litigation between NRTC and DIRECTV
and any related proceedings now or hereafter commenced (the "Litigation Expense
Budget"). Such committee will monitor expenses incurred by the Company and its
Subsidiaries in connection with such litigation. Any such expenses materially
in excess of those reflected in the Litigation Expense Budget shall be subject
to prior approval by such committee.
ARTICLE VIII
PRE-CLOSING COVENANTS OF THE PEGASUS PARTIES
Between the date of this Agreement and the Closing Date,
8.1 Additional Information. Pegasus shall provide to the Sellers and their
Representatives such financial, operating and other documents, data and
information relating to Pegasus and its Subsidiaries, including pending and
completed Acquisitions, as the Sellers or their Representatives may reasonably
request. Such access shall include the right of the Sellers and their
Representatives to inspect the records, reports and material correspondence of
NRTC and DIRECTV and discuss such records, reports and correspondence with NRTC
and DIRECTV, and Pegasus shall take all action necessary to facilitate the
foregoing. In addition, the Pegasus Parties shall take all action necessary to
enable the Sellers and their Representatives (including KPMG LLP) to review and
inspect books and records of Pegasus and its Subsidiaries and discuss them with
I-40
<PAGE>
the officers, employees, independent accountants, and counsel of the Pegasus
Parties. Notwithstanding any investigation that the Sellers may conduct of
Pegasus and its Subsidiaries, the Sellers may fully rely on the Pegasus
Parties' warranties, covenants and indemnities set forth in this Agreement, the
Collateral Documents and any documents, instruments or certificates delivered
hereunder and thereunder, which will not be waived or affected by or as a
result of such investigation.
8.2 Exclusivity. Neither any Pegasus Party, nor any of their Affiliates,
nor any of their respective Representatives shall directly or indirectly,
solicit or initiate any discussions, submissions of proposals or offers or
negotiations with, or, subject to any fiduciary obligations under applicable
law after taking into account the advice of counsel with respect thereto,
participate in any negotiations or discussions with, or provide any information
or data of any nature whatsoever to, or otherwise cooperate in any other way
with, or assist or participate in, facilitate or encourage any effort or
attempt by, any Person, other than the Company and its shareholders, employees,
Representatives, agents and Affiliates, concerning any merger, consolidation,
sale of substantial assets, sale of shares of capital stock or other equity
securities or similar transaction involving Pegasus or any of its Subsidiaries
(all such transactions being referred to as "Pegasus Alternative
Transactions"); provided, however, that the term "Pegasus Alternative
Transactions" shall not be deemed to include, and the foregoing shall not
prohibit (i) acquisitions of media and communications businesses (including
issuances of securities in connection therewith); (ii) sales or other
extraordinary transactions relating to Pegasus's broadcast television stations
or cable systems, or both; (iii) a public offering (or private placement in the
Rule 144A market) of equity or debt securities; or (iv) any transaction
described in Section 12.1(d). Pegasus shall immediately notify the Company if
any proposal, offer, inquiry or other contact is received by, any information
is requested from, or any discussions or negotiations are sought to be
initiated or continued with, Pegasus in respect of a Pegasus Alternative
Transaction, and shall, in any such notice to the Company, indicate the
identity of the offeror.
8.3 Conduct of Business. Unless Pegasus shall have obtained the prior
written consent of the Company, Pegasus shall, and shall cause each of its
Subsidiaries to, and the Principal Pegasus Shareholders shall cause Pegasus and
each of its Subsidiaries to:
(a) conduct its business in the Ordinary Course, including compliance
with its NRTC Distribution Agreements (for purposes hereof, Acquisitions
of media and communications businesses, including issuances of securities
in connection therewith, licensing transactions and distribution
arrangements involving media and communications businesses, sales or
extraordinary transactions involving cable systems or broadcast television
stations, public offerings and private placements in the Rule 144A market
of equity and debt securities and transactions described in Section
12.1(d) will be deemed conduct of business in the Ordinary Course);
(b) use its commercially reasonable efforts to maintain its business,
assets and operations, and its relationships with employees, subscribers,
and others with whom it has significant business relationships, as an
ongoing business in accordance with past practice and custom;
(c) not take or omit to take any action that would cause any of the
Pegasus Parties to be in breach of any representation or warranty in this
Agreement or the Collateral Documents the accuracy of which on the Closing
Date is a condition precedent to the Sellers' obligations under Section
12.1, or in breach of any covenant in this Agreement or the Collateral
Documents.
8.4 Consents and Approvals.
(a) As soon as practicable after execution of this Agreement, the
Pegasus Parties shall use their best efforts to obtain any necessary
consent, approval, authorization or order of, make any registration or
filing with or give notice to, any Governmental Authority or Person as is
required to be obtained, made or given by any of the Pegasus Parties to
consummate the transactions contemplated by this Agreement and the
Collateral Documents, including without limitation any authorizations,
consents, approvals, actions, filings or notices set forth in Section 4.5
of this Agreement or Section 4.5 of the Pegasus Disclosure Statement.
Notwithstanding anything in this Section to the contrary, the Pegasus
Parties shall
I-41
<PAGE>
not be required to agree to any amendment or modification in, the waiver of
any term or condition of, or the imposition of any condition to the
transfer to Pegasus of, any NRTC Distribution Agreement in order to obtain
the consents required under the NRTC Distribution Agreements.
(b) The Pegasus Parties shall cooperate with the Sellers in providing
such information and reasonable assistance as may be required in
connection with the Sellers' obligations under Section 5.4(a).
8.5 Adoption by Pegasus Shareholders. Pegasus shall, promptly after the
effective date of the Pegasus Merger Registration Statement, take all actions
necessary in accordance with the DGCL and its certificate of incorporation and
by-laws to convene a special meeting of Pegasus's shareholders to act on this
Agreement, to be held as soon as practicable following the effectiveness of the
Pegasus Merger Registration Statement. Pegasus shall use all reasonable efforts
to secure the vote of its shareholders required by the DGCL and its certificate
of incorporation and by-laws to approve and adopt this Agreement, and the board
of directors of Pegasus shall recommend to the shareholders of Pegasus such
approval and adoption. Each of the Principal Pegasus Shareholders shall vote
all of its shares of Pegasus's common stock to approve this Agreement and the
Merger.
8.6 Merger Registration Statement. As soon as practicable, and in any
event within ten Business Days after the date of this Agreement (assuming
Pegasus receives the required information from the Company its Representatives
and the Sellers on a timely basis), Pegasus shall prepare and file with the
Commission a registration statement on Form S-4 (such registration statement,
together with any amendments thereof or supplements thereto, being the "Pegasus
Merger Registration Statement") registering under the Securities Act the
Pegasus Class A Common Stock to be issued in the Merger. In addition to
registering such Class A Common Stock, the Pegasus Merger Registration
Statement will contain a combined proxy statement and prospectus (the "Proxy
Statement/Prospectus") that will constitute (i) a prospectus to be delivered to
the Shareholders in connection with the meeting or solicitation of consents
referred to in Section 7.5 and (ii) a proxy statement to be delivered to
Pegasus's shareholders in connection with the meeting of Pegasus's shareholders
referred to in Section 8.5. Pegasus shall provide the Sellers and their counsel
reasonable opportunity to review and comment upon the contents of the Pegasus
Merger Registration Statement prior to any filing, mailing or amendment
thereof. Pegasus will use commercially reasonable efforts to cause the Pegasus
Merger Registration Statement to become effective as promptly as practicable.
As promptly as practicable after the Pegasus Merger Registration Statement
shall have become effective, Pegasus shall mail or deliver the Proxy
Statement/Prospectus to the Shareholders and to the shareholders of Pegasus
entitled to notice of and to vote at the Pegasus shareholders' meeting referred
to in Section 8.5. As of their respective filing dates, all documents that
Pegasus is responsible for filing with the Commission in connection with the
transactions contemplated herein will comply as to form in all material
respects with the applicable requirements of the Securities Act, the Exchange
Act and the rules and regulations thereunder; and as of their effective dates,
their mailing dates and the dates of the meeting of Pegasus Shareholders to
vote on the Merger, no such filings will contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading. Pegasus will use best efforts to cause
the Pegasus Class A Common Stock to be issued in the Merger or to be reserved
for issuance upon the exercise of the replacement options and warrants
described in Section 2.12 to be approved for listing on the Nasdaq National
Market, subject to notice of issuance prior to the Effective Time.
8.7 Notification of Certain Matters. Pegasus shall promptly provide to the
Sellers copies of any material notices from or correspondence from and to the
NRTC or DIRECTV or any Affiliates of DIRECTV to the extent such materials are
in Pegasus's possession. Pegasus shall promptly notify the Sellers of any fact,
event, circumstance or action known to it that is reasonably likely to cause
any Pegasus Party to be unable to perform any of its covenants contained herein
or any condition precedent in Article X not to be satisfied, or that, if known
on the date of this Agreement, would have been required to be disclosed to the
Sellers pursuant to this Agreement or the existence or occurrence of which
would cause any of the Pegasus Parties' representations or warranties under
this Agreement not to be correct and/or complete. The Pegasus Parties shall
give prompt written notice to the Sellers of any adverse development causing a
breach of any of the
I-42
<PAGE>
representations and warranties in Article V or VI as of the date made. However,
except as provided in Section 8.9 or waived pursuant to Section 13.7, no
disclosure by the Pegasus Parties pursuant to this Section shall be deemed to
amend or supplement this Agreement or to prevent or cure any misrepresentation,
breach of warranty, or breach of covenant by the Pegasus Parties.
8.8 Tax Certificate. Pegasus and Merger Sub shall take no action that
would preclude them from delivering at Closing a tax certificate in the form of
Exhibit 8.
8.9 Supplements to Pegasus Disclosure Statement. The Pegasus Parties
shall, from time to time prior to Closing, supplement the Pegasus Disclosure
Statement with additional information that, if existing or known to it on the
date of this Agreement, would have been required to be included therein. For
purposes of determining the satisfaction of any of the conditions to the
obligations of the Sellers in Article X, the Pegasus Disclosure Statement shall
be deemed to include only (a) the information contained therein on the date of
this Agreement and (b) information added to the Pegasus Disclosure Statement by
written supplements delivered prior to Closing by the Pegasus Parties that (i)
are accepted in writing by the Company or (ii) reflect actions taken or events
occurring after the date hereof and prior to Closing that (A) do not breach any
covenant in this Agreement so as to cause the condition precedent stated in
Section 10.2 not to be fulfilled at or prior to the Closing, and (B) do not in
the aggregate have a Material Adverse Effect on Pegasus or a material adverse
effect on the validity, binding effect or enforceability of this Agreement or
the Collateral Documents or the ability of the Company or any of the Pegasus
Parties to perform its obligations under this Agreement or any of the
Collateral Documents.
8.10 Purchase of Certain Shares of Company Capital Stock.
(a) Within two Business Days after the expiration or early termination
of the notification period under the HSR Act described below, the Company
will (i) designate to Pegasus (A) the names of not more than twenty
existing holders of the Company's Series A, Series B, or Series C
Preferred Stock, and/or holders of Options to purchase Company Capital
Stock (subject, in the case of Options to purchase Company Capital Stock
held by members of the Company's management, to Pegasus's consent, as
provided below) (the "Selling Holders") who wish to sell shares of Company
Capital Stock or Options to purchase Company Capital Stock to Pegasus, (B)
the number and classes of shares of Company Capital Stock or Options to
purchase Company Capital Stock that the Selling Holders wish to sell to
Pegasus (the "Offered Shares"), which shall not be less than the Required
Percentage (as defined below) of the Company Common Stock (on a fully
converted basis) on the date of the designation provided herein, and (C)
the purchase price for which such Selling Holders wish to sell the Offered
Shares, which shall not exceed $25,000,000 in the aggregate; and (ii)
deliver to Pegasus a purchase agreement in the form attached hereto as
Exhibit 9, appropriately completed and executed by each Selling Holder.
"Required Percentage" means the percentage determined by (1) dividing the
dollar amount of the aggregate purchase price specified in the purchase
agreements delivered pursuant to this Section by the Market Price on the
date of this Agreement and (2) dividing the result by 6,500,000.
Notwithstanding anything herein to the contrary, Pegasus shall not be
required to purchase Options to purchase Company Capital Stock or Company
Capital Stock acquired by a member of the Company's management upon
exercise of Options after the date hereof unless Pegasus shall otherwise
consent. Promptly after execution of this Agreement, Pegasus, the Company
and, if required, the Selling Holders will make such filings as are
required under the HSR Act.
(b) Within two Business Days after receipt of the material described in
Section 8.10(a), Pegasus will (i) execute each of the purchase agreements
so received and return one copy of each to the Company and the Selling
Holders. Within two Business Days after expiration or early termination of
the waiting period under the HSR Act, Pegasus will pay to each Selling
Holder (in accordance with the instructions contained in such Selling
Holder's purchase agreement) the amount, in cash, specified in such
Selling Holder's purchase agreement against receipt by Pegasus of one or
more certificates evidencing the Offered Shares, duly endorsed (or
accompanied by a stock power duly executed) in blank.
(c) The Company will register on its transfer books the transfer to
Pegasus of all Offered Shares purchased by Pegasus under this Section
8.10. The Company waives any requirement for a signature guarantee in
connection with such registration.
I-43
<PAGE>
(d) Upon the completion of all such purchases, the Sellers shall take
all action necessary to increase the size of the Company's board of
directors by one member and elect Marshall W. Pagon to fill the vacancy so
created. Marshall W. Pagon shall continue to be a director of the Company
until the earlier of the Effective Time or the termination of this
Agreement pursuant to Article XII.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PEGASUS PARTIES
All obligations of the Pegasus Parties under this Agreement shall be
subject to the fulfillment at or prior to Closing of each of the following
conditions, it being understood that the Pegasus Parties may, in their sole
discretion, to the extent permitted by applicable Legal Requirements, waive any
or all of such conditions in whole or in part.
9.1 Accuracy of Representations. All representations and warranties of the
Company contained in sections 3.11(b), 3.15 and 3.20 (giving effect to Section
7.8) shall be true and correct on and as of the Closing Date with the same
effect as if made on the Closing Date, except to the extent that any
inaccuracies or breaches thereof would not have Adverse Consequences in excess
of $5,000,000 in the aggregate (the existence of any such breach or inaccuracy
and the amount of any such Adverse Consequences to be determined by giving
effect to the dollar thresholds contained in Section 3.15 but without regard to
any other "materiality" standard in any such Section and without regard to
clause (vi) of Section 3.11(b)). All representations and warranties of the
Company contained in Sections 3.12, 3.13 and 3.14 (giving effect to Section
7.8) shall be true and correct on and as of the Closing Date with the same
effect as if made on the Closing Date, except to the extent that any
inaccuracies or breaches thereof would not have Adverse Consequences in excess
of $2,500,000 in the aggregate (the existence of any such breach or inaccuracy
and the amount of any such Adverse Consequences to be determined by giving
effect to any "materiality" standard in any such Section, but without regard to
any dollar thresholds contained in such sections). All representations and
warranties of the Sellers contained in this Agreement, other than those
referred to in the two preceding sentences (giving effect to Section 7.8), the
Collateral Documents and any certificate delivered by any of the Sellers at or
prior to Closing shall be, if specifically qualified by materiality, true in
all respects and, if not so qualified, shall be true in all material respects,
in each case on and as of the Closing Date with the same effect as if made on
and as of the Closing Date, other than representations and warranties expressly
stated to be made as of the date of this Agreement or as of another date other
than the Closing Date. The Company shall have delivered to Pegasus and Merger
Sub a certificate dated the Closing Date to the foregoing effect.
9.2 Covenants. The Sellers shall, in all material respects, have performed
and complied with each of the covenants, obligations and agreements contained
in this Agreement that are to be performed or complied with by them at or prior
to Closing. The Company shall have delivered to Pegasus and Merger Sub a
certificate dated the Closing Date to the foregoing effect.
9.3 Consents and Approvals.
(a) All consents, approvals, authorizations and orders required to be
obtained from, and all registrations, filings and notices required to be
made with or given to, any Governmental Authority or Person as provided in
Sections 7.4(a) and 8.4(a) shall have been duly obtained, made or given,
as the case may be, and shall be in full force and effect, and any waiting
period required by applicable law, including the HSR Act, or any
Governmental Authority in connection with such transactions shall have
expired or have been earlier terminated, unless the failure to obtain,
make or give any such consent, approval, authorization, order,
registration, filing or notice, or to allow any such waiting period to
expire or terminate would not have a Material Adverse Effect on the
Company or a material adverse effect on the validity, binding effect or
enforceability of this Agreement or the Collateral Documents or the
ability of the Company or any of the GSS Parties to perform its
obligations under this Agreement or any of the Collateral Documents.
(b) Notwithstanding the foregoing, the condition precedent stated in
subsection (a) shall not have been satisfied if (i) any consent, approval,
authorization or order obtained in connection with the
I-44
<PAGE>
transactions contemplated by this Agreement and the Collateral Documents is
conditioned upon or related to the amendment, modification, cancellation or
termination of, or waiver of any term or condition of, any contract,
commitment or agreement, or imposes upon Pegasus, any of its Subsidiaries,
the Surviving Corporation or any of its Subsidiaries any condition or
requirement or change in policy not now imposed upon Pegasus, the Company,
the Business or the DIRECTV Distribution Business of Pegasus (regardless of
whether such imposition is specifically related to or predicated upon or
precedes or follows such consent, approval, authorization or order) and
(ii) in the case of consents, approvals, authorizations and orders other
than those required from NRTC and DIRECTV, any such amendment,
modification, cancellation, termination, waiver or imposition would have a
Material Adverse Effect on the Company or the DIRECTV Distribution Business
of Pegasus.
(c) This Agreement and the Merger shall have been approved by the
requisite vote of Pegasus's shareholders in accordance with the DGCL and
the rules of the Nasdaq Stock Market.
(d) This Agreement and the Merger shall have been approved by the
requisite vote of the Company's Shareholders in accordance with the DGCL
and the Company's Certificate of Incorporation and by-laws.
(e) Pegasus and Merger Sub shall have been furnished with appropriate
evidence, reasonably satisfactory to it and its counsel, of the granting
of such consents, approvals, authorizations and orders, the making of such
registrations and filings and the giving of such notices referred to in
subsections (a), (c) and (d).
9.4 Dissenters' Rights. The period for assertion of dissenters' rights
pursuant to Section 262 of the DGCL shall have expired, and the holders of
Company Capital Stock entitled to receive not more than ten percent of the
Pegasus Class A Common Stock included in the Merger Consideration shall have
perfected their dissenters' appraisal rights under Section 262 of the DGCL in
connection with the Merger.
9.5 Delivery of Documents. The Company shall have delivered, or caused to
be delivered, to Pegasus and Merger Sub the following documents:
(i) Registration Rights Agreement, executed by each Principal Company
Shareholder and by each other Shareholder and each member of Company
Senior Management who elects to do so.
(ii) Escrow Agreement, executed by the Escrow Agent and the Company, and
delivery to the Escrow Agent of the shares of Pegasus Class A Common Stock
required by Section 2.7 to be delivered to the Escrow Agent.
(iii) Voting Agreement, executed by the Principal Company Shareholders
who are required to execute the Voting Agreement.
(iv) Certified copies of the Company's certificate or incorporation and
by-laws and certified resolutions of the board of directors and
Shareholders of the Company authorizing the execution of this Agreement
and the Collateral Documents to which it is a party and the consummation
of the transactions contemplated hereby and thereby.
(v) Opinion of McDermott, Will & Emery, counsel to the Sellers, dated
the Closing Date, in form and substance reasonably satisfactory to
Pegasus.
(vi) All books and records of the Company and its Subsidiaries.
(vii) All originally executed NRTC Distribution Agreements, and all
originally executed amendments thereto, that are in the Company's
possession, and copies of all such documents the originals of which are
not in the Company's possession.
(viii) To the extent in the Company's possession, all original Consumer
Contracts and all original files relating thereto.
(ix) Resignations of all members of the board of directors or similar
body of the Company and each of its Subsidiaries effective as of the
Effective Time.
I-45
<PAGE>
(x) A tax certificate in the form of Exhibit 7, executed by the Company.
(xi) Such other documents and instruments as Pegasus may reasonably
request: (A) to evidence the accuracy of the Seller's representations and
warranties under this Agreement, the Collateral Documents and any
documents, instruments or certificates required to be delivered
thereunder; (B) to evidence the performance by the Company and the GSS
Parties of, or the compliance by the Company and the GSS Parties with, any
covenant, obligation, condition and agreement to be performed or complied
with by the Company or any of the GSS Parties under this Agreement and the
Collateral Documents; or (C) to otherwise facilitate the consummation or
performance of any of the transactions contemplated by this Agreement and
the Collateral Documents.
9.6 No Material Adverse Change. Since the date hereof, there shall have
been no material adverse change in the Assets or in the business, financial
condition or operations of the Company and its Subsidiaries, taken as a whole,
other than changes affecting generally the NRTC and its members and affiliates
who provide DIRECTV services.
9.7 No Litigation. No action, suit or proceeding shall be pending or
threatened by or before any Governmental Authority, and no Legal Requirement or
policy (other than proceedings and Legal Requirements affecting generally the
NRTC and its members and affiliates who provide DIRECTV services) of the NRTC,
DirecTV, Inc. or any of their affiliates, or any applicable regulatory
authority, shall have been enacted, promulgated or issued that would: (i)
prohibit or adversely affect in any material respect Pegasus's or the Surviving
Corporation's and its Subsidiaries' ownership or operation of all or a material
portion of the Business or the Assets or materially and adversely affect the
value of the Assets; (ii) materially restrict or limit or otherwise condition
Pegasus's or the Surviving Corporation's and its Subsidiaries' right to
transfer and/or assign the Business or the Assets in the future; (iii) compel
Pegasus or the Surviving Corporation or any of its Subsidiaries to dispose of
or hold separate all or a material portion of the Business or the Assets as a
result of any of the transactions contemplated by this Agreement and the
Collateral Documents; (iv) prevent or make illegal the consummation of any
transactions contemplated by this Agreement and the Collateral Documents; or
(v) cause any of the transactions contemplated by this Agreement and the
Collateral Documents to be rescinded following consummation.
9.8 NRTC Compliance Certificate. The Company shall have delivered to
Pegasus a certificate or letter from NRTC dated as of the Closing Date to the
effect that the Company and its Subsidiaries are in material compliance with
the NRTC Distribution Agreements and there are no payments due by the Company
under the NRTC Distribution Agreements other than payments for fees due in the
Ordinary Course and not yet payable.
9.9 South Plains. The Company or one of its Subsidiaries shall have
acquired all the partnership interest in South Plains DBS, L.P. not currently
owned by the Company and its Subsidiaries. Nothing contained elsewhere in this
Agreement shall prohibit the Company and its Subsidiaries from doing so.
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS
All obligations of the Sellers under this Agreement shall be subject to
the fulfillment at or prior to Closing of the following conditions, it being
understood that the Sellers may, in their sole discretion, to the extent
permitted by applicable Legal Requirements, waive any or all of such conditions
in whole or in part.
10.1 Accuracy of Representations. All representations and warranties of
the Pegasus Parties contained in this Agreement (giving effect to Section 8.9)
and the Collateral Documents and any other document, instrument or certificate
delivered by any of the Pegasus Parties at or prior to the Closing shall be, if
specifically qualified by materiality, true and correct in all respects and, if
not so qualified, shall be true and correct in all material respects, in each
case on and as of the Closing Date with the same effect as if made on and as of
the Closing Date, other than representations and warranties expressly stated to
be made as of the date of this Agreement or as of another date other than the
Closing Date. The Pegasus Parties shall have delivered to the Sellers a
certificate dated the Closing Date to the foregoing effect.
I-46
<PAGE>
10.2 Covenants. The Pegasus Parties shall, in all material respects, have
performed and complied with each obligation, agreement, covenant and condition
contained in this Agreement and the Collateral Documents and required by this
Agreement and the Collateral Documents to be performed or complied with by the
Pegasus Parties at or prior to Closing. The Pegasus Parties shall have
delivered to the Company a certificate dated the Closing Date to the foregoing
effect.
10.3 Consents and Approvals.
(a) All consents, approvals, authorizations and orders required to be
obtained from, and all registrations, filings and notices required to be
made with or given to, any Governmental Authority or Person as provided in
Section 8.4(a) and by NRTC and DIRECTV shall have been duly obtained, made
or given, as the case may be, and shall be in full force and effect, and
any waiting period required by applicable law, including the HSR Act, or
any Governmental Authority in connection with such transactions shall have
expired or have been earlier terminated, unless the failure to obtain,
make or give any such consent, approval, authorization, order,
registration, filing or notice, or to allow any such waiting period to
expire or terminate would not have a Material Adverse Effect on Pegasus or
a material adverse effect on the validity, binding effect or
enforceability of this Agreement or the Collateral Documents or the
ability of the Company or any of the Pegasus Parties to perform its
obligations under this Agreement or any of the Collateral Documents.
(b) This Agreement and the Merger shall have been approved by the
requisite vote of Pegasus's shareholders in accordance with the DGCL,
Pegasus's Certificate of Incorporation and by-laws and the rules of the
Nasdaq Stock Market.
(c) This Agreement and the Merger shall have been approved by the
requisite vote of the Company's Shareholders in accordance with the DGCL
and the Company's Certificate of Incorporation and by-laws.
(d) The Sellers shall have been furnished with the appropriate evidence,
reasonably satisfactory to them and their counsel, of the granting of such
consents, approvals, authorizations and orders, the making of such
registrations and filings and the giving of such notices referred to in
subsections (a), (b) and (c).
10.4 Delivery of Documents. The Pegasus Parties, as applicable, shall have
executed and delivered, or caused to be executed and delivered, to the Company
and the Principal Company Shareholders the following documents:
(i) Registration Rights Agreement, executed by Pegasus.
(ii) Escrow Agreement, executed by Pegasus and the Escrow Agent.
(iii) Voting Agreement, executed by the Principal Pegasus Shareholders
and by Marshall W. Pagon.
(iv) Certified copies of the certificate of incorporation and by-laws of
Pegasus and certified resolutions by the board of directors and
Shareholders of Pegasus authorizing the execution of this Agreement and
the Collateral Documents and the consummation of the transactions
contemplated hereby.
(v) Such other documents and instruments as the Sellers may reasonably
request: (A) to evidence the accuracy of the representations and
warranties of the Pegasus Parties under this Agreement and the Collateral
Documents and any documents, instruments or certificates required to be
delivered thereunder; (B) to evidence the performance by the Pegasus
Parties of, or the compliance by the Pegasus Parties with, any covenant,
obligation, condition and agreement to be performed or complied with by
the Pegasus Parties under this Agreement and the Collateral Documents; or
(C) to otherwise facilitate the consummation or performance of any of the
transactions contemplated by this Agreement and the Collateral Documents.
(vi) Opinion of Drinker Biddle & Reath LLP, counsel to the Pegasus
Parties, dated the Closing Date, in form and substance reasonably
satisfactory to the Company.
I-47
<PAGE>
(vii) Opinion of Drinker Biddle & Reath LLP, counsel to Pegasus, in form
reasonably satisfactory to the Principal Company Shareholders, to the
effect that the Merger qualifies as a tax-free reorganization under
Section 368(a) of the Code.
10.5 No Material Adverse Change. There shall have been no material adverse
change in the business, financial condition or operations of Pegasus and its
Subsidiaries taken as a whole, other than changes affecting generally the NRTC
and its members and affiliates who provide DIRECTV services.
10.6 Litigation. No action, suit or proceeding shall be pending or
threatened by or before any Governmental Authority and no Legal Requirement
shall have been enacted, promulgated or issued or deemed applicable to any of
the transactions contemplated by this Agreement and the Collateral Documents
that would: (i) prevent consummation of any of the transactions contemplated by
this Agreement and the Collateral Documents; (ii) cause any of the transactions
contemplated by this Agreement and the Collateral Documents to be rescinded
following consummation; (iii) result in the Class A Common Stock being
ineligible for trading on the Nasdaq Stock Market or a national securities
exchange in the United States; or (iv) have a Material Adverse Effect on
Pegasus (other than proceedings and Legal Requirements affecting generally the
NRTC and its members and affiliates who provide DIRECTV services).
10.7 Nasdaq Listing. The shares of Pegasus Class A Common Stock issuable
in the Merger and those to be reserved for issuance upon exercise of the
replacement options and warrants described in Section 2.12 shall have been
approved for listing on the Nasdaq Stock Market upon official notice of
issuance.
10.8 Pegasus Merger Registration Statement. The Pegasus Merger
Registration Statement shall have become effective in accordance with the
provisions of the Securities Act, and no stop order suspending such
effectiveness shall have been issued and remain in effect and no proceeding for
that purpose shall have been instituted by the Commission or any state
regulatory authorities.
ARTICLE XI
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following Closing:
11.1 Transition. None of the Principal Company Shareholders shall take any
action that is designed or intended to have the effect of discouraging any
lessor, licensor, subscriber, supplier or other business associate of the
Company, its Subsidiaries or the Business from maintaining the same business
relationships with Pegasus, the Surviving Corporation and its Subsidiaries
after Closing as it maintained with the Company and its Subsidiaries prior to
Closing.
11.2 Indemnification of Directors, Officers and Managers of the Company
and its Predecessors; Directors' and Officers' Insurance.
(a) The certificate of incorporation and by-laws of the Surviving
Corporation (and of any corporation that shall succeed to it by merger,
consolidation or otherwise) shall contain the provisions with respect to
indemnification set forth in the certificate of incorporation and bylaws
of the Company on the date of this Agreement, which provisions shall not
be amended, repealed or otherwise modified for a period of six (6) years
after the Effective Time in any manner that would adversely affect the
rights thereunder of persons who at any time prior to the Effective Time
were identified as prospective indemnitees under the certificate of
incorporation or bylaws of the Company in respect of actions or omissions
occurring at or prior to the Effective Time (including, without
limitation, the transactions contemplated by this Agreement), unless such
modification is required by applicable law.
(b) From and after the Effective Time, the Surviving Corporation shall
indemnify, defend and hold harmless the present and former officers,
directors and employees of the Company (and its predecessors) and its
Subsidiaries (collectively, the "GSS Indemnified Parties") against all
Adverse Consequences (including amounts that are paid in settlement of,
with the approval of Pegasus and the Surviving Corporation (which approval
shall not be unreasonably withheld)), or otherwise in connection with, any
claim, action, suit, proceeding or investigation (a "Claim"), based in
whole or in part on the fact that such person is or was such a director,
manager, officer or employee and arising out of actions or
I-48
<PAGE>
omissions occurring at or prior to the Effective Time (including, without
limitation, the transactions contemplated by this Agreement), in each case
to the fullest extent permitted under the DGCL (and shall pay expenses in
advance of the final disposition of any such action or proceeding to each
GSS Indemnified Party to the fullest extent permitted under the DGCL, upon
receipt from the Indemnified Party to whom expenses are advanced of the
undertaking to repay such advances contemplated by Section 145(e) of DGCL).
(c) Without limiting the foregoing, in the event any Claim is brought
against any GSS Indemnified Party (whether arising before or after the
Effective Time) after the Effective Time, (i) subject to the last sentence
of this subsection (c), the Surviving Corporation may retain counsel
reasonably acceptable to the GSS Indemnified Parties to represent them in
connection with the claim, and if it shall fail to do so the GSS
Indemnified Parties may retain their regularly engaged independent legal
counsel as of the date of this Agreement, or other independent legal
counsel satisfactory to them provided that such other counsel shall be
reasonably acceptable to Pegasus and the Surviving Corporation, (ii) the
Surviving Corporation shall pay all reasonable fees and expenses of such
counsel for the GSS Indemnified Parties promptly as statements therefor
are received, and (iii) the Surviving Corporation will use its reasonable
efforts to assist in the vigorous defense of any such matter, provided
that the Surviving Corporation shall not be liable for any settlement of
any Claim effected without its written consent, which consent shall not be
unreasonably withheld. Any GSS Indemnified Party wishing to claim
indemnification under this Section 11.2, promptly upon learning of any
such Claim, shall notify the Surviving Corporation (although the failure
so to notify the Surviving Corporation shall not relieve the Surviving
Corporation from any liability which the Surviving Corporation may have
under this Section 11.2, except to the extent such failure prejudices the
Surviving Corporation), and shall deliver to the Surviving Corporation the
undertaking contemplated by Section 145(e) of DGCL. The GSS Indemnified
Parties and the Surviving Corporation and its Affiliates as a group shall
be represented by one law firm (in addition to local counsel) with respect
to each such matter unless there is, under applicable standards of
professional conduct (as reasonably determined by counsel to such GSS
Indemnified Parties) a conflict on any significant issue between the
position of the Surviving Corporation and its Affiliates, on the one hand,
and one or more GSS Indemnified Parties, on the other hand, or between the
position of any two or more of such GSS Indemnified Parties, as the case
may be, in which event additional counsel as may be required may be
retained by such GSS Indemnified Parties, and the reasonable fees and
expenses of such additional counsel shall be paid by the Surviving
Corporation.
(d) Pegasus shall cause to be maintained in effect for not less than six
(6) years after the Effective Time the current policies of directors' and
officers' liability insurance and fiduciary liability insurance maintained
by the Company with respect to matters occurring prior to the Effective
Time; provided, however, that Pegasus may substitute therefor policies of
substantially the same coverage containing terms and conditions that are
substantially the same for the GSS Indemnified Parties to the extent
reasonably available.
(e) This Section 11.2 is intended to be for the benefit of, and shall be
enforceable by, the GSS Indemnified Parties referred to herein, their
heirs and personal representatives and shall be binding on Pegasus and
Merger Sub and the Surviving Corporation and their respective successors
and assigns.
(f) Notwithstanding anything else in this Section 11.2, no GSS
Indemnified Party shall be entitled to indemnification under this Section
11.2 or under any provision of the Company's certificate of incorporation
or by-laws as to any matter as to which Pegasus is entitled to be
indemnified pursuant to Article XIII.
11.3 Offers to Purchase. Pegasus shall cause the Surviving Corporation to
make the Offers to Purchase within the time required by the Company Indentures.
11.4 Confidentiality. Each Principal Company Shareholder shall maintain as
confidential any information and documentation related to the business of
Pegasus or its Subsidiaries that is or has been disclosed to such Principal
Company Shareholder by Pegasus, its Subsidiaries, or their respective
Representatives in connection with the negotiation, execution and delivery of
this Agreement and the
I-49
<PAGE>
transactions contemplated hereby or that such Principal Company Shareholder has
obtained about the Company as a result of its ownership of Company Capital
Stock (the "Confidential Information"). Notwithstanding the foregoing, no
Principal Company Shareholder shall be required to maintain the confidentiality
of those portions of the Confidential Information that (i) become generally
available to the public other than as a result of a disclosure by the Principal
Company Shareholder, (ii) were known by the Principal Company Shareholder or
were available to the Principal Company Shareholder on a non-confidential basis
prior to the disclosure of such Confidential Information in connection with the
transactions contemplated hereby or as a result of its ownership of Company
Capital Stock; provided that the source of such information was not known by
the Principal Company Shareholder to be bound by a confidentiality agreement
with or other contractual, legal or fiduciary obligation of confidentiality to
Pegasus or its Subsidiaries with respect to such material, or (iii) become
available to the Principal Company Shareholder on a non-confidential basis, at
any time after the disclosure of such Confidential Information in connection
with the transactions contemplated hereby or other than as a result of its
ownership of Company Capital Stock, from a source other than Pegasus, its
Subsidiaries or their respective Representatives; provided that the source of
such information was not known by the Principal Company Shareholder to be bound
by a confidentiality agreement with or other contractual, legal or fiduciary
obligation of confidentiality to Pegasus or its Subsidiaries with respect to
such material. No Principal Company Shareholder shall use the Confidential
Information for any purpose other than in connection with the negotiation,
execution and delivery of this Agreement and the transactions contemplated
hereby, including but not limited to, enforcement of remedies pursuant to
Sections 13.2 and 13.3 hereof and any continuing obligations of Pegasus, the
Company or the Principal Company Shareholders under this Agreement.
I-50
<PAGE>
ARTICLE XII
TERMINATION
12.1 Events of Termination. This Agreement may be terminated and the
transactions contemplated by this Agreement may be abandoned at any time prior
to Closing as provided below:
(a) This Agreement may be terminated by the mutual written consent of
both Pegasus and the Company at any time prior to Closing.
(b) The Pegasus Parties may terminate this Agreement by giving written
notice to the Sellers at any time prior to Closing if the Company or any
of the Sellers breaches any representation, warranty or covenant contained
in this Agreement, which breach if unremedied would cause any condition
precedent stated in Article IX not to be satisfied, Pegasus notifies the
Sellers of the breach, and the breach continues without cure for a period
of 30 days after the notice of breach.
(c) The Company may terminate this Agreement by giving written notice to
Pegasus at any time prior to Closing if any Pegasus Party breaches any
representation, warranty or covenant contained in this Agreement, which
breach if unremedied would cause any condition precedent stated in Article
X not to be satisfied, the Sellers notify Pegasus of the breach, and the
breach continues without cure for a period of 30 days after the notice of
breach.
(d) The Company may terminate this Agreement if any of the following
occurs after the date hereof and before the Closing (it being understood
that the occurrence of any of the following will not constitute a breach
of this Agreement by any of the Pegasus Parties):
(i) Pegasus or any of its Subsidiaries makes any Acquisition or an
investment in any business in any single transaction or series of
related transactions if the consolidated gross revenue of the DIRECTV
Distribution Business of Pegasus and its consolidated Subsidiaries for
the period of four fiscal quarters ending on the last day of the most
recent fiscal quarter for which financial statements are available
would be 75 percent or less of the consolidated gross revenues of
Pegasus and its Subsidiaries for such period, in each case on a pro
forma basis on the assumption that the Acquisition or investment had
occurred at the beginning of such period;
(ii) Pegasus or any of its Subsidiaries disposes of any portion of
its DIRECTV Distribution Business unless (A) such disposition is made
in connection with the acquisition of one or more other DIRECTV
Distribution Businesses, and (B) the net decrease in the consolidated
gross revenues of the DIRECTV Distribution Business of Pegasus and its
consolidated Subsidiaries for the period of four fiscal quarters ending
on the last day of the most recent fiscal quarter for which financial
statements are available, on a pro forma basis, on the assumption that
such disposition and the related acquisitions had occurred at the
beginning of such period, would not exceed ten percent of the actual
consolidated gross revenues of the DIRECTV Distribution Business of
Pegasus and its consolidated Subsidiaries for such period;
(iii) Pegasus or any of its Subsidiaries incurs indebtedness in
excess of $50,000,000 in the aggregate other than in connection with
acquisitions (including increases in the letter of credit posted in
favor of NRTC) and other than under the Pegasus Credit Agreement;
(iv) Pegasus declares or pays any dividend or other distribution on
its capital stock or redeems or repurchases any of its capital stock,
other than (A) regularly scheduled dividend payments on Pegasus's
Series A Preferred Stock, (B) redemptions or repurchase of shares of
employees in connection with the termination of their employment, or
(C) dividends payable in common stock or stock splits; or
(v) Pegasus or any of its Subsidiaries enters into any transaction
(or series of related transactions), other than (A) transactions in the
Ordinary Course (B) transactions of the nature described in any of
paragraphs (i) through (v), and (C) transactions described in Section
5.10 of the Company Disclosure Statement, but exclusive of transactions
described in Section 8.10, resulting in an expenditure or commitment in
excess of $50,000,000.
I-51
<PAGE>
(e) Either Pegasus or the Company may terminate this Agreement if the
Closing shall not have occurred on or before June 30, 2000 (the "Outside
Closing Date"), otherwise than because of a breach by the terminating
Party of any of its representations, warranties or covenants in this
Agreement, except that the Outside Closing Date shall be subject to
extension as follows:
(i) If the condition precedent in Section 9.9 (relating to South
Plains DBS, L.P.) is not satisfied by June 30, 1999, then, subject to
paragraph (iii), the Company may, by written notice to Pegasus, extend
the Outside Closing Date until September 30, 1999.
(ii) If the Outside Closing Date is extended pursuant to paragraph
(i) and the condition precedent in Section 9.9 is not satisfied by
September 30, 1999, the Company may, by written notice to Pegasus,
require Pegasus to waive such condition precedent.
(iii) If all conditions precedent other than the one stated in
Section 9.9 are satisfied or waived at any time, Pegasus may waive such
condition precedent and the parties shall proceed to complete the
Closing, in which case paragraph (i) will cease to apply.
12.2 Effect of Termination. Upon any termination of this Agreement, all
obligations under this Agreement shall cease, and there shall be no liability
or further obligation under this Agreement on the part of the Company, any
subsidiary of the Company, any other GSS Party, Pegasus, or any other Pegasus
Party or their respective officers and directors, except for any obligation or
liability of any Party based on or arising from a breach or default by such
Party with respect to any of the covenants contained in Sections 7.2 and 8.2.
No termination of this Agreement shall affect any Party's obligation under the
Confidentiality Agreement.
12.3 Procedure Upon Termination. If this Agreement is terminated by any
Party pursuant to this Article, notice of such termination shall promptly be
given by the terminating Party to the other Party.
ARTICLE XIII
INDEMNIFICATION
13.1 Survival of Representations and Warranties.
(a) Except to the extent waived pursuant to Section 13.7, the
representations and warranties contained in Sections 2.13, 3.2(d),
3.11(b), 5.11(a), 5.12(b) and 7.10 and the last sentence of Section 5.2
and in the information contained in the list and calculation furnished to
Pegasus pursuant to Section 2.7(c) shall survive Closing and shall expire
six months after the Closing Date; provided, however, that such survival
shall be for the sole purpose of supporting indemnification claims under
Section 13.2 and 13.3; and provided further that such expiration will not
include, extend or apply to any claim for indemnification made pursuant to
Section 13.2 or 13.3 prior to such date.
(b) Except as provided in Section 13.1(a), all of the representations
and warranties contained in this Agreement shall be deemed conditions to
the Merger, to the extent stated in Sections 9.1 and 10.1, and shall not
survive the Closing or the termination of this Agreement.
(c) If the Closing occurs (i) all covenants of the Sellers and the
Pegasus Parties contained in Articles VII and VIII shall expire at the
Closing (including any claim based on a breach of any such covenant or
agreement occurring before the Closing), and (ii) the other covenants and
agreements of the Pegasus Parties and the Sellers in this Agreement shall
survive indefinitely.
13.2 Indemnification Provisions for Benefit of the Pegasus Parties.
(a) If the Company breaches (or if any third party alleges facts that,
if true, would mean the Company has breached) any representation or
warranty of the Company that survives the Closing pursuant to Section
13.1, or if the Company 1999 Forms 10-K (or if any third party alleges
facts that, if true, would mean the Company 1999 Forms 10-K), contained,
as of their filing dates, an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in
which they are made, not misleading, and if in any such case Pegasus makes
a written claim for indemnification no later than six months after the
Closing Date (the "Indemnification Period"), then, subject to the
limitations contained elsewhere in this Article
I-52
<PAGE>
XIII, the Shareholders shall, severally and in proportion to the amount of
the Merger Consideration received by each, indemnify Pegasus, the Surviving
Corporation and their Affiliates and the shareholders, directors, officers,
employees, agents, successors and assigns of any of such Persons (the
"Pegasus Indemnitees") from and against any Adverse Consequences that any
such Person may suffer through and after the date of the claim for
indemnification (including any Adverse Consequences that any such Person
may suffer after the end of the Indemnification Period) resulting from,
arising out of, relating to or caused by the breach, untrue statement or
omission. In addition, if Pegasus makes a written claim for indemnification
within the Indemnification Period, then subject to the limitations
contained elsewhere in this Article XIII, the Shareholders shall, severally
and in proportion to the amount of the Merger Consideration received by
each, indemnify the Pegasus Indemnitees from and against any Adverse
Consequences that any of the Pegasus Indemnitees may suffer through and
after the date of the claim for indemnification (including any Adverse
Consequences that any such Person may suffer after the end of the
Indemnification Period) resulting from, arising out of relating to or
caused by any of the following:
(i) any failure on the part of the Company or any of its Subsidiaries
to comply with the Satellite Home Viewer Act and the Satellite Home
Viewer Improvement Act of 1999 with respect to Grade A and Grade B
subscribers receiving over-the-air signals from the primary network
stations affiliated with a network; or
(ii) any claim that the Company failed to consummate any Acquisition
of a DIRECTV Distribution Business in violation of a legal obligation
to do so, whether or not any such matter is disclosed in the Company
Disclosure Statement or is otherwise known to Pegasus.
In addition, provided that Pegasus makes a written claim for indemnification
within the Indemnification Period, then, subject to the limitations contained
elsewhere in this Article XIII, the Shareholders shall, severally and in
proportion to the amount of the Merger Consideration received by each,
indemnify the Pegasus Indemnitees as follows:
(A) if the partnership interest in South Plains DBS, L.P. not
currently owned by the Company and its Subsidiaries (the "Minority
Interest") is acquired by the Company or its Subsidiaries before the
Closing, or by Pegasus or its Subsidiaries after the Closing but before
the expiration of the Indemnification Period, the Pegasus Parties shall
be indemnified for the excess of the cost to purchase the Minority
Interest over $13,075,000; or
(B) if the Minority Interest is not acquired by the Company,
Pegasus or any of their respective subsidiaries before the expiration of
the Indemnification Period, the Pegasus Parties shall be indemnified for
the sum of $13,075,000.
Between the Closing Date and the expiration of the Indemnification Period,
Pegasus shall be required to accept (or cause one of its Subsidiaries to
accept) any all-cash offer approved by the Principal Company Shareholders to
acquire the Minority Interest pursuant to commercially reasonable documentation
for not more than $13,075,000.
(b) Notwithstanding the foregoing, the Shareholders shall not have any
obligation to indemnify any Pegasus Indemnitee under Section 13.2(a)
unless the Adverse Consequences with respect thereto shall exceed
$25,000,000 in the aggregate, in which case they shall be required to
indemnify the Pegasus Indemnitees for all Adverse Consequences, including
the first $25,000,000. This limitation shall not apply to obligations
arising out of the breach of any representation, warranty or covenant
contained in Section 2.13 or 3.2(d) or the list or calculation furnished
to Pegasus pursuant to Section 2.7(c).
(c) Notwithstanding the foregoing, the liability of any Shareholder
under Section 13.2(a) shall be satisfied only by the delivery pursuant to
Section 13.6 of Escrowed Shares held for such Shareholder's account by the
Escrow Agent, valued in accordance with Section 13.6. This limitation
shall not apply to obligations arising out of the breach of any
representation, warranty or covenant contained in Section 2.13 or 3.2(d)
or the list or calculation furnished to Pegasus pursuant to Section
2.7(c).
I-53
<PAGE>
13.3 Indemnification Provisions for Benefit of the Shareholders.
(a) If Pegasus breaches (or if any third party alleges facts that, if
true, would mean that Pegasus has breached) any representation or warranty
of Pegasus that survives the Closing pursuant to Section 13.1 or if the
Pegasus Merger Registration Statement (or if any third party alleges facts
that, if true, would mean that the Pegasus Merger Registration Statement),
as of the Closing Date, contained an untrue statement of material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they are made, not misleading (except for statements made or
facts omitted in reliance on and in conformity with information furnished
in writing by the Company or any Principal Company Shareholder
specifically for inclusion therein), and if, in any such case, any
Shareholder makes a written claim for indemnification against Pegasus and
the Surviving Corporation within the Indemnification Period, then subject
to the limitations contained elsewhere in this Article XIII, Pegasus and
the Surviving Corporation shall jointly and severally indemnify, defend
and hold harmless the Shareholders, the former directors, officers,
employees and agents of the Company and its Affiliates and the successors
and assigns of any of such Persons (the "Company Indemnitees"), from and
against any Adverse Consequences that any such Person may suffer through
and after the date of the claim for indemnification (including any Adverse
Consequences that any such Person may suffer after the end of the
Indemnification Period) resulting from, arising out of, relating to or
caused by the breach, untrue statement or omission.
(b) Notwithstanding the foregoing, Pegasus and the Surviving Corporation
shall not have any obligation to indemnify any Company Indemnitee under
Section 13.3(a) unless the Adverse Consequences described therein shall
exceed $25,000,000 in the aggregate, in which case they shall be required
to indemnify the Company Indemnitees for all Adverse Consequences,
including the first $25,000,000. This limitation shall not apply to
obligations arising out of the breach of any representation or warranty
contained in the last sentence of Section 5.2.
(c) Notwithstanding the foregoing, the liability of Pegasus and the
Surviving Corporation under Section 13.3(a) shall be satisfied only by the
delivery pursuant to Section 13.6 of additional shares of Pegasus Class A
Common Stock, valued in accordance with Section 13.6, and shall be limited
in the aggregate to 975,000 shares of Pegasus Class A Common Stock
(adjusted as provided in the last sentence of Section 2.7(a)) valued in
accordance with Section 13.6. This limitation shall not apply to
obligations arising out of the breach of any representation or warranty
contained in the last sentence of Section 5.2.
13.4 Matters Involving Third Parties.
(a) If any third party shall notify either Pegasus, the Surviving
Corporation or any Principal Company Shareholder (the "Indemnified Party")
prior to the expiration of the Indemnification Period with respect to any
matter (a "Third Party Claim") that may give rise to a claim for
indemnification against the other (the "Indemnifying Party") under this
Article, then the Indemnified Party shall promptly notify the Indemnifying
Party thereof in writing; provided, however, that no delay on the part of
the Indemnified Party in notifying any Indemnifying Party (but not beyond
the expiration of the Indemnification Period, or, in the case of notice of
a Third Party Claim received by the Indemnified Party on the last day of
the Indemnification Period, the next Business Day) shall relieve the
Indemnifying Party from any obligation hereunder unless (and then solely
to the extent) the Indemnifying Party thereby is prejudiced.
(b) Any Indemnifying Party shall have the right to defend the
Indemnified Party against the Third Party Claim with counsel of its choice
reasonably satisfactory to the Indemnified Party so long as: (i) the
Indemnifying Party notifies the Indemnified Party in writing within 15
days after the Indemnified Party has given notice of the Third Party Claim
that the Indemnifying Party will indemnify the Indemnified Party from and
against the entirety of any Adverse Consequences the Indemnified Party may
suffer (limited as provided in this Article XIII) resulting from, arising
out of, relating to, in the nature of or caused by the Third Party Claim;
(ii) the Indemnifying Party provides the Indemnified Party with evidence
acceptable to the Indemnified Party that the Indemnifying Party will have
the financial resources to defend against the Third Party Claim and
fulfill its indemnification obligations hereunder (subject to
I-54
<PAGE>
the aggregate limitations contained herein); (iii) the Third Party Claim
involves only money damages and does not seek an injunction or other
equitable relief; (iv) settlement of, or an adverse judgment with respect
to, the Third Party Claim is not, in the good faith judgment of the
Indemnified Party, likely to (A) exceed the limit of the Indemnifying Party
hereunder or (B) establish a precedent, custom or practice materially
adverse to the continuing business interests of the Indemnified Party; and
(v) the Indemnifying Party conducts the defense of the Third Party Claim
actively and diligently.
(c) So long as the Indemnifying Party is conducting the defense of the
Third Party Claim in accordance with subsection (b): (i) the Indemnified
Party may retain separate co-counsel at its sole cost and expense and
participate in the defense of the Third Party Claim; (ii) the Indemnified
Party shall not consent to the entry of any judgment or enter into any
settlement with respect to the Third Party Claim without the prior written
consent of the Indemnifying Party (not to be withheld unreasonably); and
(iii) the Indemnifying Party shall not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party
Claim without the prior written consent of the Indemnified Party (not to
be withheld unreasonably).
(d) If any of the conditions in Section 13.4(b) is not or no longer
satisfied, however: (i) the Indemnified Party may defend against, and
consent to the entry of any judgment or enter into any settlement with
respect to, the Third Party Claim in any manner it reasonably may deem
appropriate (and the Indemnified Party need not consult with, or obtain
any consent from, any Indemnifying Party in connection therewith); (ii)
the Indemnifying Party shall reimburse the Indemnified Party promptly and
periodically for the costs of defending against the Third Party Claim
(including attorneys' fees and expenses) by delivery of shares of Pegasus
Class A Common Stock, from the Escrowed Shares or otherwise, valued as set
forth in Section 13.6; and (iii) the Indemnifying Party shall remain
responsible for any Adverse Consequences the Indemnified Party may suffer
resulting from, arising out of, relating to, in the nature of or caused by
the Third Party Claim to the fullest extent, but subject to the
limitations, provided in this Article XIII.
13.5 Determination of Adverse Consequences. Pegasus, the Surviving
Corporation and the Shareholders shall take into account the time cost of money
(using the Applicable Rate as the discount rate) in determining Adverse
Consequences for purposes of this Article XIII. Adverse Consequences arising
from a breach or alleged breach of any representation or warranty referred to
in Section 13.2 or 13.3 shall be calculated, and whether there is a breach of
any such representation or warranty for purposes of Section 13.2 or 13.3 shall
be determined, without reference to any dollar threshold or materiality
threshold contained in any such representation or warranty (it being understood
that any such threshold shall be given effect for determining whether any
condition precedent stated in Section 9.1 or 10.1 shall have been satisfied as
of the Closing Date). All indemnification obligations under this Article shall
be net of any insurance proceeds received by the Indemnified Party in respect
of the event or circumstance giving rise to the claim for indemnification and
shall be deemed adjustments to the Merger Consideration.
13.6 Payment in Shares. All shares of Pegasus Class A Common Stock
delivered in satisfaction of any indemnity claim under this Article XIII shall
be delivered free and clear of all Encumbrances other than transfer
restrictions under applicable securities laws. Each share of Pegasus Class A
Common Stock (whether included in the Escrowed Shares or otherwise) delivered
in satisfaction of any such indemnity claim shall be valued at the Market Price
on the Closing Date (adjusted for stock splits and reclassifications). Any
dividends previously paid and any other distributions made after the Closing
Date in respect of shares of Pegasus Class A Common Stock delivered to Pegasus
in settlement of any indemnity claim (whether paid in cash, securities or other
property) shall also be transferred, free and clear of all Encumbrances other
than transfer restrictions under applicable Securities laws, to Pegasus; and in
the case of Pegasus Class A Common Stock delivered to any Company Indemnitee in
settlement or any indemnity claim, Pegasus shall be required to deliver to such
Company Indemnitee the amount of any cash, securities or other property, valued
at the date of such settlement, that such Company Indemnitee would have
received had such Company Indemnitee owned such shares on the date of such
dividend or distribution.
13.7 No Indemnification for Certain Disclosed Matters.
(a) If any of the Sellers shall disclose in writing to Pegasus on or
before the Closing Date pursuant to Section 7.7 or 7.8 (but not otherwise)
any fact that would cause any condition precedent stated in
I-55
<PAGE>
Article IX not to be satisfied or would give rise to a right on the part of
the Pegasus Parties to terminate this Agreement pursuant to Section 12.1,
if the Pegasus Parties do not terminate this Agreement pursuant to Section
12.1, then, except for matters described in Section 13.2(a)(i), (ii), (A)
or (B), the Pegasus Indemnitees shall be deemed to have waived any claim to
indemnification based on such fact upon completion of the Closing.
(b) If Pegasus shall disclose in writing to the Company on or before the
Closing Date pursuant to Section 8.7 or 8.8 (but not otherwise) any fact
that would cause any condition precedent stated in Article X not to be
satisfied or would give rise to a right on the part of the Company to
terminate this Agreement pursuant to Section 12.1, if the Company does not
terminate this Agreement pursuant to Section 12.1, then the Company
Indemnitees shall be deemed to have waived any claim to indemnification
based on such fact upon completion of the Closing.
ARTICLE XIV
MISCELLANEOUS
14.1 Parties Obligated and Benefited. This Agreement shall be binding upon
the Parties and their respective successors by operation of law and shall inure
solely to the benefit of the Parties and their respective successors by
operation of law, and no other Person shall be entitled to any of the benefits
conferred by this Agreement, except that the Shareholders shall be third party
beneficiaries of this Agreement. Without the prior written consent of the other
Party, no Party may assign this Agreement or the Collateral Documents or any of
its rights or interests or delegate any of its duties under this Agreement or
the Collateral Documents; provided, however, that Pegasus may collaterally
assign its rights under this Agreement and the Collateral Documents to any
Persons providing debt financing to Pegasus or its Affiliates.
14.2 Notices. Any notices and other communications required or permitted
hereunder shall be in writing and shall be effective upon delivery by hand or
upon receipt if sent by certified or registered mail (postage prepaid and
return receipt requested) or by a nationally recognized overnight courier
service (appropriately marked for overnight delivery) or upon transmission if
sent by telex or facsimile (with request for immediate confirmation of receipt
in a manner customary for communications of such respective type and with
physical delivery of the communication being made by one or the other means
specified in this Section as promptly as practicable thereafter). Notices shall
be addressed as follows:
(a) If to Pegasus, Merger Sub or the Surviving Corporation, to:
Pegasus Communications Corporation
c/o Pegasus Communications Management Company
225 City Line Avenue, Suite 200
Bala Cynwyd, PA 19004
Attn: Mr. Ted S. Lodge
Telecopier: 610-934-7072
(b) If to the Company before the Closing Date to:
Golden Sky Holdings, Inc.
4700 Belleview, Suite 300
Kansas City, MO 64112
Attn: Jo Ellen Linn, Esq.
Telecopier: 816-753-5595
with a copy to:
Karen A. Dewis, Esq.
McDermott, Will & Emery
600 13th Street, NW
Washington, DC 20005
Telecopier: 202-756-8087
I-56
<PAGE>
(c) If to the Principal Company Shareholders, before or after the
Closing Date, to:
William P. Collatos
c/o Spectrum Equity Investors
1 International Place, 29th Floor
Boston, MA 02110
Telecopier: 617-464-4601
with a copy to:
Karen A. Dewis, Esq.
McDermott, Will & Emery
600 13th Street, NW
Washington, DC 20005
Telecopier: 202-756-8087
(d) If to any Shareholder after the Closing Date, by notice to the
Shareholder Representative at: 12748 Delmar Drive, Leawood, KS 66209.
Any Party may change the address to which notices are required to be sent by
giving notice of such change in the manner provided in this Section.
14.3 Attorneys' Fees. In the event of any action or suit based upon or
arising out of any alleged breach by any Party of any representation, warranty,
covenant or agreement contained in this Agreement or the Collateral Documents,
the prevailing Party shall be entitled to recover reasonable attorneys' fees
and other costs of such action or suit from the other Party.
14.4 Headings. The Article and Section headings of this Agreement are for
convenience only and shall not constitute a part of this Agreement or in any
way affect the meaning or interpretation thereof.
14.5 Choice of Law. This Agreement and the rights of the Parties under it
shall be governed by and construed in all respects in accordance with the laws
of the State of Delaware, without giving effect to any choice of law provision
or rule (whether of the State of Delaware or any other jurisdiction that would
cause the application of the laws of any jurisdiction other than the State of
Delaware).
14.6 Rights Cumulative. All rights and remedies of each of the Parties
under this Agreement shall be cumulative, and the exercise of one or more
rights or remedies shall not preclude the exercise of any other right or remedy
available under this Agreement or applicable law.
14.7 Further Actions. The Parties shall execute and deliver to each other,
from time to time at or after Closing, for no additional consideration and at
no additional cost to the requesting party, such further assignments,
certificates, instruments, records, or other documents, assurances or things as
may be reasonably necessary to give full effect to this Agreement and to allow
each party fully to enjoy and exercise the rights accorded and acquired by it
under this Agreement.
14.8 Time of the Essence. Time is of the essence under this Agreement. If
the last day permitted for the giving of any notice or the performance of any
act required or permitted under this Agreement falls on a day which is not a
Business Day, the time for the giving of such notice or the performance of such
act shall be extended to the next succeeding Business Day.
14.9 Late Payments. If either Party fails to pay the other any amounts
when due under this Agreement, the amounts due will bear interest from the due
date to the date of payment at the Applicable Rate.
14.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14.11 Entire Agreement. This Agreement (including the Exhibits, the
Company Disclosure Statement, the Pegasus Disclosure Statement and any other
documents, instruments and certificates referred to herein, which are
incorporated in and constitute a part of this Agreement) contains the entire
agreement of the Parties
I-57
<PAGE>
and supersedes all prior oral or written agreements, understandings and
representations to the extent that they relate in any way to the subject matter
hereof, excluding the Confidentiality Agreement, which shall survive the
execution and delivery of, and any termination of, this Agreement.
14.12 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Parties. No waiver by any party of any default, misrepresentation or breach of
warranty or covenant hereunder shall be valid unless the same shall be in
writing and signed by the Person against whom its enforcement is sought, and no
such waiver whether intentional or not, shall be deemed to extend to any prior
or subsequent default, misrepresentation or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.13 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. If an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if
drafted jointly by the parties and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local,
or foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean "including without limitation." If any Party has
breached any representation, warranty or covenant contained herein in any
respect, the fact that there exists another representation, warranty or
covenant relating to the same subject matter (regardless of the relative levels
of specificity) which the Party has not breached shall not detract from or
mitigate the fact that the party is in breach of the first representation,
warranty or covenant.
14.14 Expenses. Except as otherwise provided in this Agreement, each Party
shall bear its own costs and expenses (including legal fees and expenses and
accountants' fees and expenses) incurred in connection with the negotiation of
this Agreement, the performance of its obligations and the consummation of the
transactions contemplated hereby.
14.15 Disclosure. The terms of this Agreement are confidential and no
Party shall disclose to any individual or entity such terms, except that (i)
any Party may make such disclosure about this Agreement and information related
thereto as is required (in the opinion of its counsel) by law (including
filings and other disclosure required under the Securities Act or the Exchange
Act); (ii) any Party may make such disclosure to its Representatives and
lenders who agree to keep the terms of this Agreement confidential; (iii) the
Parties may disclose the terms of this Agreement to the NRTC and DirecTV, Inc.;
(iv) the Sellers may disclose the terms of this Agreement to the Shareholders;
(v) Pegasus may disclose the terms of this Agreement to its shareholders; and
(vi) no Party shall have any obligation to refrain from disclosing any matter
that shall have become a matter of public knowledge other than by a breach of
such Party's obligations hereunder. Each of the Parties will be responsible for
any damages resulting from the unauthorized disclosure of the terms of this
Agreement by it or its Representatives.
14.16 Shareholder Representative. Each Shareholder irrevocably makes,
constitutes and appoints John R. Hager as its sole and exclusive agent (the
"Shareholder Representative") and authorizes and empowers it to fulfill the
role of Shareholder Representative under this Merger Agreement. If a successor
Shareholder Representative is needed, such successor shall be appointed by
William P. Collatos. Each Shareholder hereby makes, constitutes and appoints
the Shareholder Representative as such Shareholder's true and lawful attorney
in fact and agent, for such Shareholder and in such Shareholder's name, (i) to
participate in the closing on such Shareholder's behalf, to take all actions
which might be taken in connection therewith and with the transactions
contemplated thereby, (ii) to receive all notices to the Shareholders, (iii) to
make and settle claims against the Pegasus Parties relating to or arising from
the Merger Agreement or the transactions contemplated hereby, and to respond to
and settle all claims made by the Pegasus Parties related to or arising from
the Merger Agreement or the transactions contemplated hereby, (iv) to execute
and deliver the Escrow Agreement and all notices and instructions contemplated
thereunder, and (v) to execute and deliver all other instruments and documents
of every kind incident to any of the foregoing and to consent or approve or
refrain from consenting or approving with respect to all matters incident to
the foregoing, for all intents and purposes and with the same effect as such
Shareholder could do personally, and each Shareholder hereby ratifies and
I-58
<PAGE>
confirms as its own act all that the Shareholder Representative shall do or
cause to be done pursuant to the provisions hereof. The Pegasus Parties may
conclusively rely on the actions taken by the Shareholder Representative
pursuant to the authorization granted by this Section to be binding on all the
Shareholders hereunder for all purposes.
IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement
as of the day and year first above written.
PEGASUS COMMUNICATIONS CORPORATION
By: /s/ Ted S. Lodge
----------------------------------
Ted S. Lodge,
Senior Vice President
PEGASUS GSS MERGER SUB, INC.
By: /s/ Ted S. Lodge
-----------------------------------
Ted S. Lodge,
Senior Vice President
Principal Pegasus Shareholders:
PEGASUS CAPITAL, L.P.
By: Pegasus Capital, Ltd., General
Partner
By: /s/ Ted S. Lodge
-----------------------------------
Ted S. Lodge,
Senior Vice President
PEGASUS COMMUNICATIONS HOLDINGS, INC.
By: /s/ Ted S. Lodge
-----------------------------------
Ted S. Lodge,
Senior Vice President
I-59
<PAGE>
GOLDEN SKY HOLDINGS, INC.
By: /s/ Rodney A. Weary
-----------------------------------
Rodney A. Weary
President
Principal Company Shareholders:
ALTA SUBORDINATED DEBT PARTNERS III, L.P.
By: Alta Subordinated Debt Management III, L.P.
By: /s/ Eileen McCarthy
-----------------------------------
Eileen McCarthy
General Partner
ALTA COMMUNICATIONS VI, L.P.
By: Alta Communications VI Management
Partners, L.P.
By: /s/ Eileen McCarthy
-----------------------------------
Eileen McCarthy
General Partner
ALTA-COMM S BY S, LLC
By: /s/ Eileen McCarthy
-----------------------------------
Eileen McCarthy
Member
HARBOURVEST PARTNERS V-DIRECT FUND L.P.
By: HVP V-Direct Associates, LLC,
Its General Partner
By: HarbourVest Partners, LLC,
Its Managing Member
By: /s/ William A. Johnston
--------------------------------
William A. Johnston
Partner
I-60
<PAGE>
SPECTRUM EQUITY INVESTORS L.P.
By: Spectrum Equity Associates, L.P.,
General Partner
By: /s/ William P. Collatos
------------------------------------
William P. Collatos
General Partner
SPECTRUM EQUITY INVESTORS II, L.P.
By: Spectrum Equity Associates II, L.P.,
General Partner
By: /s/ William P. Collatos
------------------------------------
William P. Collatos
General Partner
NORWEST EQUITY PARTNERS VI,
A MINNESOTA LIMITED PARTNERSHIP
By: Itasca Partners V, L.L.P.,
General Partner
By: /s/ Erik Torgerson
------------------------------------
Erik Torgerson
Partner
NORWEST VENTURE PARTNERS VI, LP
By: Itasca VC Partners VI, L.L.P.,
General Partner
By: /s/ John P. Whaley
------------------------------------
John P. Whaley
Partner
BANCBOSTON VENTURES INC.
By: /s/ William O. Charman
------------------------------------
William O. Charman
Vice President
I-61
<PAGE>
ANNEX II
FORM OF VOTING AGREEMENT
AMENDED AND RESTATED VOTING AGREEMENT, dated _________________, 2000,
among PEGASUS COMMUNICATIONS CORPORATION, a Delaware corporation (the
"Company"); COLUMBIA CAPITAL CORPORATION, a Virginia corporation, and COLUMBIA
DBS, INC., a Virginia corporation; FLEET VENTURE RESOURCES, INC., a Rhode
Island corporation, FLEET EQUITY PARTNERS VI, L.P., a Delaware limited
partnership, CHISHOLM PARTNERS III, L.P., a Delaware limited partnership, and
KENNEDY PLAZA PARTNERS, a Rhode Island general partnership; SPECTRUM EQUITY
INVESTORS, L.P. and SPECTRUM EQUITY INVESTORS II, L.P. (each a Delaware limited
partnership and together referred to herein as "Spectrum"), ALTA COMMUNICATIONS
VI, L.P., a Delaware limited partnership, ALTA SUBORDINATED DEBT PARTNERS III,
L.P., a Delaware limited partnership and ALTA-COMM S BY S, LLC, a Massachusetts
limited liability company (together referred to herein as "Alta"); and PEGASUS
COMMUNICATIONS HOLDINGS, INC., a Delaware corporation, PEGASUS CAPITAL, L.P., a
Pennsylvania limited partnership, PEGASUS SCRANTON OFFER CORP, a Delaware
corporation, PEGASUS NORTHWEST OFFER CORP, a Delaware corporation, and MARSHALL
W. PAGON, an individual.
The Company, Pegasus DTS Merger Sub, Inc., a Delaware corporation ("DTS
Merger Sub"), Digital Television Services, Inc., a Delaware corporation
("DTS"), and certain shareholders of the Company and of DTS are parties to an
Agreement and Plan of Merger dated January 8, 1998 (the "DTS Merger
Agreement"). Certain of the DTS Parties (this and certain other terms are
defined in Section 1) or certain of their equity holders were shareholders of
DTS. At the closing held on April 28, 1998, under the DTS Merger Agreement, (1)
DTS Merger Sub was merged with and into DTS, (2) DTS thereby became a
wholly-owned subsidiary of the Company, (3) certain of the DTS Parties or
certain of their equity holders received shares of Class A Common Stock as the
DTS Merger Consideration, and (4) the Company, the Pegasus Parties, the DTS
Parties, and Whitney Equity Partners, L.P., a Delaware limited partnership
("Whitney"), entered into a Voting Agreement dated April 27, 1998 (the
"Original Voting Agreement"). Whitney no longer has the right to designate a
director of the Company, pursuant to Section 4.1(b)(1) to the Original Voting
Agreement.
The Company, Pegasus GSS Merger Sub, Inc., a Delaware corporation ("GSS
Merger Sub"), Golden Sky Holdings, Inc., a Delaware corporation ("GSS"), and
certain shareholders of the Company and GSS (including Spectrum and Alta) are
parties to an Agreement and Plan of Merger dated January 10, 2000 (the "GSS
Merger Agreement").
At the Closing held today under the GSS Merger Agreement, (1) GSS Merger
Sub is being merged with and into GSS, (2) GSS is thereby becoming a
wholly-owned subsidiary of the Company, and (3) Spectrum and Alta are receiving
shares of Class A Common Stock. It is a condition precedent to the Closing that
the parties hereto execute and deliver this Agreement.
PCH, PCLP, PSOC and PNOC hold all the issued and outstanding shares of
Class B Common Stock. Pagon controls PCH, PCLP, PSOC and PNOC.
NOW, THEREFORE, in consideration of the completion of the transactions
contemplated by the DTS Merger Agreement and the GSS Merger Agreement and of
the mutual covenants contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
and intending to be legally bound, the parties amend and restate the Original
Voting Agreement, effective the date first written above, to read as follows.
SECTION 1
DEFINITIONS
1.1 Definitions. As used in this Agreement, the following terms have the
following terms have the following meanings:
"Alta": as defined in the recitals.
"Alta Designee": a person designated by Alta to serve as a director in
accordance with this Agreement.
II-1
<PAGE>
"Audit Committee": the audit committee of the Board of Directors referred
to in Section 3.4.
"Board of Directors": the board of directors of the Company.
"Chisholm": Chisholm Partners III, L.P., a Delaware limited partnership.
"Chisholm Designee": a person designated by Chisholm to serve as a
director in accordance with this Agreement.
"Class A Common Stock": the Company's Class A Common Stock, par value
$0.01 per share.
"Class B Common Stock": the Company's Class B Common Stock, par value
$0.01 per share.
"Columbia Capital": Columbia Capital Corporation, a Virginia corporation.
"Columbia Designee": a person designated by Columbia Capital to serve as a
director in accordance with this Agreement.
"Columbia Parties": Columbia Capital and Columbia DBS, Inc., a Virginia
corporation.
"Columbia Principal": each of James B. Murray, Jr., David P. Mixer, Mark
R. Warner, Robert B. Blow, Mark J. Kington, Harry F. Hopper, III, R. Philip
Herget, III, Neil P. Byrne, Barton Schneider and James Fleming.
"Committee": the Audit Committee, the Compensation Committee or the
Nominating Committee.
"Compensation Committee": the compensation committee of the Board of
Directors referred to in Section 3.4.
"Covered Shares": (a) the shares of Class A Common Stock received as the
DTS Merger Consideration by the shareholders of DTS that are parties to this
Agreement; (b) the shares of Class A Common Stock received as the GSS Merger
Consideration by Spectrum and Alta; and (c) all shares of voting securities of
the Company now or hereafter beneficially owned (within the meaning of the
Securities Exchange Act of 1934) by PCH, PCLP, PSOC, PNOC or Pagon.
"Designation Right Loss Event": With respect to any person, any of the
following, as determined by a majority of the Independent Directors (whose
determination shall be conclusive):
(a) such person's designee as a director commits a breach of fiduciary
duty to the Company or a material violation of any federal or state
securities law in connection with the purchase or sale of any of the
Company's securities;
(b) such person (or, in the case of Columbia Capital, any Columbia
Principal who owns at the time 100,000 or more shares of Class A Common
Stock) commits a material violation of any federal or state securities law
in connection with the purchase or sale of any of the Company's
securities;
(c) such person materially breaches its or his noncompetition or
confidentiality agreement with the Company, if any;
(d) such person shall own, control, manage or be financially interested,
directly or indirectly, in any business (other than a less than 5%
interest in a publicly held company) that competes with the Company or any
of its Subsidiaries in any geographic area in which the Company does
business; but this paragraph (d) shall not apply (1) to any investment
held on November 5, 1997, by any of the DTS Parties or their Affiliates or
any investment held on January 10, 2000, by any of the GSS Parties or
their respective Affiliates, (2) to any investment in a business that
comes into competition with the Company or any of its Subsidiaries as a
result of the Company's acquisition or establishment of a new business or
its expansion into a geographic area in which it did not previously
operate if such person shall have held such investment before the
Company's management proposes to the Board of Directors such acquisition,
establishment or expansion, (3) to any investment in an investment fund or
pool that itself makes or holds an investment in a competitive business if
such person (A) is regularly engaged in making investment of that kind and
(B) does not have the power to, and does not in fact, exercise an
influence on the decision of the fund or pool in making the investment in
the competitive business, and (4) unless
II-2
<PAGE>
prior to the exercise by a majority of the Independent Directors of the
right to terminate the relevant person's right to designate a director,
such person is given notice of the potential applicability of this
paragraph (d) and fails to cure or modify the relationship to the
satisfaction of a majority of the Independent Directors within 30 days
after the notice is given; provided, however, that in no event shall this
subsection (d) apply to any Person associated with, related to, affiliated
with, controlled by, controlling or under common control with, Alta or
Spectrum other than Spectrum Equity Investors II, L.P., Spectrum Equity
Investors, L.P., Alta Communications VI, L.P., Alta Subordinated Debt
Partners III, L.P. and Alta-Comm S by S, LLC.
(e) such person shall violate Section 2; or
(f) any director designated by such person shall take or omit to take
any action in his capacity as a director or Committee member in a manner
materially inconsistent with this Agreement, and the Person who has the
right to designate such director has not obtained such director's
resignation as a director within 30 days after being requested to do so by
the Board of Directors.
"Director" or "director": a member of the Board of Directors.
"DTS": as defined in the recitals.
"DTS Designee": a Columbia Designee or a Chisholm Designee.
"DTS Merger Agreement": as defined in the recitals.
"DTS Merger Consideration": the "Merger Consideration" as defined in the
DTS Merger Agreement.
"DTS Parties": the Columbia Parties and the Fleet Parties.
"Fleet Parties": Chisholm, Fleet Venture Resources, Inc., a Rhode Island
corporation, Fleet Equity Partners VI, L.P., a Delaware limited partnership,
and Kennedy Plaza Partners, a Rhode Island general partnership.
"GSS": as defined in the recitals.
"GSS Designee": a Spectrum Designee or an Alta Designee.
"GSS Merger Agreement": as defined in the recitals.
"GSS Merger Consideration": the "Merger Consideration" as defined in the
GSS Merger Agreement.
"GSS Parties": Spectrum and Alta.
"Independent Director": a natural person who (a) is not Marshall W. Pagon
or a Columbia Principal or an officer, employee or principal of the Company,
PCH, PCLP, PSOC, PNOC, any of the Columbia Parties, any of the Fleet Parties,
DTS, Spectrum, Alta, GSS, or any of their subsidiaries or affiliates, or any
spouse or sibling, or any ancestor or lineal descendant of any such person,
spouse or sibling ("immediate family"), (b) is not a former officer or employee
of any such person, (c) does not in addition to such person's role as a
director, act on a regular basis, either individually or as a member or
representative of an organization, serving as a professional adviser, legal
counsel or consultant to any such person, if, in the reasonable discretion of
the Nominating Committee, such relationship is material to any such person, and
(d) does not represent, and is not a member of the immediate family of, a
person who would not satisfy the requirements of the preceding clauses (a), (b)
and (c) of this sentence. A person who has been or is a partner, officer or
director of an organization that has customary commercial, industrial, banking
or underwriting relationships with any of the persons named in clause (a) of
the preceding sentence that are carried on in the ordinary course of business
and on an arms-length basis and who otherwise satisfies the requirements set
forth in clauses (a), (b), (c) and (d) of the first sentence of this
definition, may qualify as a Independent Director unless, in the reasonable
discretion of the Nominating Committee, such person is not independent or may
not be independent with respect to the management of the business and affairs
of the Company. A person shall not be disqualified as an Independent Director
under clause (b), (c) or (d) above solely because of such person's (or a member
of
II-3
<PAGE>
such person's immediate family's) having served in any capacity with a business
(other than DTS or GSS) acquired by the Company, or solely because such person
is a representative or designee of any such business (whether or not the
Company shall enter into a consulting agreement with such person in connection
with such acquisition).
"Pagon": Marshall W. Pagon, an individual.
"Pagon Designee": a person designated by Pagon (or, in the event of his
death or incapacity, by PCLP or another person appointed by Pagon for this
purpose) to serve as a director in accordance with this Agreement.
"PCH": Pegasus Communications Holdings, Inc., a Delaware corporation.
"PCLP": Pegasus Capital, L.P., a Pennsylvania limited partnership.
"PNOC": Pegasus Northwest Offer Corp, a Delaware corporation.
"PSOC": Pegasus Scranton Offer Corp, a Delaware corporation.
"Permitted Transferee": as defined in the Company's certificate of
incorporation on the date hereof.
"Person" or "person": an individual, a partnership (general or limited),
corporation, limited liability company, joint venture, business trust,
cooperative, association or other form of business organization, whether or not
regarded as a legal entity under applicable law, a trust (inter vivos or
testamentary), an estate of a deceased, insane or incompetent person, a
quasi-governmental entity, a government or any agency, authority, political
subdivision or other instrumentality thereof, or any other entity.
"Spectrum": as defined in the recitals.
"Spectrum Designee": a person designated by Spectrum to serve as a
director in accordance with this Agreement.
SECTION 2
VOTING
Section 2.1 Each party warrants to the others that, as of the date of this
Agreement, it has voting control over the number of Covered Shares set forth
opposite its name on Exhibit A. Each party shall vote all Covered Shares held
by it, or over which it has the power to direct the voting, as specified in
this Agreement and shall take any and all other action necessary or appropriate
to implement the provisions of this Agreement, including without limitation
proposing and voting on amendments to the Company's certificate of
incorporation and by-laws as may be necessary to fully implement the provisions
hereof. No party shall permit any Covered Shares held by it, or over which it
has the power to direct the voting, to be voted in any manner inconsistent with
this Agreement. "Voting" includes the execution of written consents.
SECTION 3
COMPOSITION OF BOARD OF DIRECTORS AND COMMITTEES
Section 3.1 Board of Directors. Except as otherwise provided in Section
3.3, the Board of Directors shall consist of eleven members, of whom:
(a) four will be Pagon Designees;
(b) one will be a Columbia Designee until Columbia Capital ceases to
have the right to designate a director under Section 4.1(a);
(c) one will be a Chisholm Designee until Chisholm ceases to have the
right to designate a director under Section 4.1(b);
(d) one will be a Spectrum Designee until Spectrum ceases to have the
right to designate a director under Section 4.1(c);
(e) one will be an Alta Designee until Alta ceases to have the right to
designate a director under Section 4.1(d); and
II-4
<PAGE>
(f) three will be Independent Directors, who shall be the persons
identified in Section 3.5(f) (so long as they continue to satisfy the
definition of "Independent Director") or their successors (who satisfy the
definition of "Independent Director") nominated by the Nominating
Committee.
Section 2.1 shall apply to the election of directors specified in this Section
3.1.
Section 3.2 Vacancies Caused by Resignation, etc. of Designated Directors. Any
vacancy in the Board of Directors or a Committee caused by the resignation,
removal, incapacity or death of a Pagon Designee, a DTS Designee or a GSS
Designee shall be filled by a person designated by the party that had the right
to designate the resigned, removed, incapacitated or dead director or Committee
member, except as provided in Section 3.3. Section 2.1 shall apply to the
election of directors and Committee members specified in this Section 3.2.
Section 3.3 Other Vacancies.
(a) If Columbia Capital, Chisholm, Spectrum or Alta ceases to have the
right to designate a director pursuant to Section 4.1, such party shall
promptly cause the director designated by it to resign if so requested by
Pagon (or, in the event of his death or incapacity, by PCLP or another
person appointed for Pagon for this purpose), except that in case of the
loss pursuant to Section 4.1(a)(1) or (b)(1) or of the right of Columbia
Capital or Chisholm to designate a director, as the case may be, which
also results in the termination of this Agreement pursuant to Section 4.3,
such party shall cause the director designated by it to resign not later
than the date on which this Agreement terminates.
(b) Failing any resignation required by subsection (a), the affected
director or directors may be removed in the manner provided by law.
(c) If a vacancy occurs in the Board of Directors by reason of any
required resignation or permitted removal described in subsection (a) or
(b), the Board of Directors (as constituted after giving effect to such
vacancy) shall either (1) reduce the number of directors to eliminate the
vacancy or (2) instruct the Nominating Committee to nominate an
Independent Director to fill the vacancy.
(d) The size of the Board of Directors may be increased as provided by
law. Each director elected to fill any position created by an increase in
the size of the Board of Directors shall be an Independent Director.
(e) No party to this Agreement will take any action to fill a vacancy
created under this Section 3.3 by a person who is not an Independent
Director. Otherwise, Section 2.1 shall not apply to the election of
directors to fill vacancies created under this Section 3.3.
Section 3.4 Committees. The existence of the Audit Committee, the
Nominating Committee and the Compensation Committee shall continue. Each
Committee shall consist of three directors who shall be (1) a director
designated by Pagon, (2) a director designated by a majority of the DTS
Designees and GSS Designees then serving as directors; and (3) one of the
Independent Directors specified in Section 3.1(f) designated by the Board of
Directors in the manner provided by law. The Audit Committee and the
Compensation Committee shall have the powers and functions of the present audit
committee and compensation committee of the Board of Directors. The Nominating
Committee shall nominate all persons (other than the Pagon Designees, the DTS
Designees and the GSS Designees) to serve as directors, which nominee shall be
subject to election by the shareholders of the Company or subject to
appointment by the Board of Directors to fill vacancies. The Company shall not
establish a committee with the authority to act on all or substantially all
matters on which the Board of Directors may act (commonly known as an
"executive committee") without the consent of a majority of the DTS Designees
and the GSS Designees as a single group.
Section 3.5 Initial Designations. The parties make the following
designations pursuant to this Section 3:
(a) The Pagon Designees are Pagon, Robert N. Verdecchio, _______________
and ____________.
(b) The Columbia Designee is Harry F. Hopper III.
(c) The Chisholm Designee is Riordon B. Smith.
II-5
<PAGE>
(d) The Spectrum Designee is William P. Collatos.
(e) The Alta Designee is Robert Benbow.
(f) The Independent Directors specified in Section 3.1(f) are
_____________________, _______________ and _______________, each of whom
is currently a director of the Company.
Immediately following the execution of this Agreement, the Board of Directors
shall take such action as shall be required to create vacancies on the Board of
Directors and to elect persons to the Board of Directors as specified in this
Section 3.5. The parties will make their designations to the Committees at a
later date.
Section 3.6 Subsequent Designations. Except as provided in Section 3.5,
each party to this Agreement that is entitled to designate one or more
directors or Committee members shall do so by written notice to each of the
other parties to this Agreement and to the Secretary of the Company, signed by
the Person making such designation.
Section 3.7 Removal. Any director may be removed by the shareholders of
the Company in the manner provided by law, except that no DTS Designee or GSS
Designee may be removed without the written consent of the party that
designated him unless such party shall have ceased to have the right to
designate a director pursuant to Section 4.1. Section 2.1 shall apply to this
Section 3.7.
Section 3.8 Chairman, President and Chief Executive Officer. For so long
as this Agreement is in effect, Pagon will be elected by the Board of Directors
as Chairman, President and Chief Executive Officer of the Company, except in
case of incapacity.
Section 3.9 Separate Voting Rights of Other Classes of Stock. If the
holders of any class of the Company's preferred stock shall become entitled to
elect directors in accordance with the terms of such preferred stock, this
Agreement shall not apply to any additional directorships to which their rights
apply.
Section 3.10 Failure or Delay in Making Designations. No failure or delay
by any party in making any designation of a director or Committee member
[including the fact that Pagon has made only [_____] of his four designations
in Section 3.5(a))]shall constitute a waiver of such party's right to make
designations in the future.
SECTION 4
TERMINATION
Section 4.1 Termination of Designation Rights.
(a) Columbia Capital shall cease to have the right to designate a
director if at any time (1) the Columbia Parties and the Columbia
Principals collectively own less than half the shares of Class A Common
Stock received by the Columbia Parties and the Columbia Principals
pursuant to the DTS Merger Agreement, or (2) a Designation Right Loss
Event occurs with respect to any Columbia Party or any Columbia Principal.
(b) Chisholm shall cease to have the right to designate a director if at
any time (1) the Fleet Parties collectively own less than half the Covered
Shares received by them pursuant to the DTS Merger Agreement, or (2) a
Designation Right Loss Event occurs with respect to any Fleet Party.
(c) Spectrum shall cease to have the right to designate a director if at
any time Spectrum owns less than half the Covered Shares received by
Spectrum pursuant to the GSS Merger Agreement, or (2) a Designation Right
Loss Event occurs with respect to Spectrum.
(d) Alta shall cease to have the right to designate a director if at any
time Alta owns less than half the Covered Shares received by Alta pursuant
to the GSS Merger Agreement, or (2) a Designation Right Loss Event occurs
with respect to Alta.
(e) For purposes of this Section 4.1, a party no longer owns shares of
Class A Common Stock distributed to its equity holders unless the
distributee is also a party to this Agreement on the date hereof or, in
the case of the Columbia Parties, is a Columbia Principal. Continuing
ownership of Covered Shares shall be determined by the specific
identification method.
II-6
<PAGE>
(f) At the Company's request from time to time, Columbia Capital,
Chisholm, Spectrum and Alta shall certify (and Columbia Capital and
Chisholm shall cause the Columbia Principals and the Fleet Parties,
respectively, to certify) to the Company in writing, the number of shares
of Class A Common Stock received as part of the DTS Merger Consideration
or the GSS Merger Consideration, as the case may be, that each such person
continues to own. If requested by the Company, each such person will
provide the Company with evidence reasonably substantiating such person's
continuing ownership of such shares. If any such person fails to deliver
such certification or evidence to the Company within ten days after the
Company delivers its written request therefor to Columbia Capital,
Chisholm, Spectrum or Alta, such person shall be deemed for all purposes
of this Agreement not to own any such shares of Class A Common Stock.
Section 4.2 Termination of Voting Obligations.
(a) The obligations of any party under Section 2.1 shall terminate with
respect to any Covered Share upon the sale or other transfer of such
Covered Share to any person who is not a party to this Agreement and is
not required by subsection (b) to become a party to this Agreement.
(b) PCH, PCLP, PSOC or PNOC shall not sell or otherwise transfer any
Covered Shares to a Permitted Transferee unless the Permitted Transferee
agrees in writing to be bound by, and to become a party to, this Agreement
(including the requirements of this subsection) to the same extent as its
transferor, as it relates to the Covered Shares so transferred.
(c) The obligations of Spectrum and Alta under Section 2.1 shall
terminate upon the resignation of the Spectrum Designee or the Alta
Designee, as the case may be, from the Board of Directors, provided that
the vacancy caused thereby is not filled by Spectrum or Alta, as the case
may be, pursuant to Section 3.2 within five days of such resignation.
Section 4.3 Termination of Agreement. This Agreement shall terminate as to
each of Columbia Capital, Chisholm, Spectrum and Alta as of the date that such
party ceases to have the right to designate a Director pursuant to Section 4.1.
This Agreement shall terminate in its entirety on the later of (1) the date of
the meeting of the Company's shareholders at which directors are scheduled to
be elected next following the date on which both of Columbia Capital and
Chisholm shall cease to have the right to designate a director pursuant to
Section 4.1, or (2) the last date on which either Spectrum or Alta has the
right to designate a director pursuant to Section 4.1. Neither Section 2 nor
the requirements of this Agreement relating to actions by the Nominating
Committee shall apply to the election of directors to occur at such meeting.
SECTION 5
MISCELLANEOUS
Section 5.1 Notices. Except as otherwise provided below, whenever it is
provided in this Agreement that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties hereto, or whenever any of the parties hereto, wishes to provide
to or serve upon the other party any other communication with respect to this
Agreement, each such notice, demand, request, consent, approval, declaration or
other communication shall be in writing and shall be delivered in person or
sent by telecopy, as specified in the DTS Merger Agreement or the GSS Merger
Agreement, as the case may be.
Section 5.2 Entire Agreement. This Agreement represents the entire
agreement and understanding among the parties hereto with respect to the
subject matter hereof and supersedes any and all prior oral and written
agreements, arrangements and understandings among the parties hereto with
respect to such subject matter; and this Agreement can be amended, supplemented
or changed, and any provision hereof can be waived or a departure from any
provision hereof can be consented to, only by a written instrument making
specific reference to this Agreement signed by all parties to this Agreement
other than (a) the Columbia Parties if Columbia Capital shall no longer have
the right to designate a director pursuant to Section 4.1, (b) the Fleet
Parties if Chisholm shall no longer have the right to designate a director
pursuant to Section 4.1, (c) Spectrum if Spectrum shall no longer have the
right to designate any director pursuant to Section 4.1, or (d) Alta if Alta
shall no longer have the right to designate any director pursuant to Section
4.1.
II-7
<PAGE>
Section 5.3 Paragraph Headings. The paragraph headings contained in this
Agreement are for general reference purposes only and shall not affect in any
manner the meaning, interpretation or construction of the terms or other
provisions of this Agreement.
Section 5.4 Applicable Law. This Agreement shall be governed by, construed
and enforced in accordance with the laws of Delaware applicable to contracts to
be made, executed, delivered and performed wholly within such state and, in any
case, without regard to the conflicts of law principles of such state.
Section 5.5 Severability. If any provision of this Agreement shall be held
by any court of competent jurisdiction to be illegal, void or unenforceable,
such provision shall be of no force and effect, but the illegality or
unenforceability of such provision shall have no effect upon and shall not
impair the enforceability of any other provision of this Agreement.
Section 5.6 No Waiver. The failure of any party at any time or times to
require performance of any provision hereof shall not affect the right at a
later time to enforce the same. No waiver by any party of any condition, and no
breach of any provision, term, covenant, representation or warranty contained
in this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be construed as a further or continuing waiver of
any such condition or of the breach of any other provision, term, covenant,
representation or warranty of this Agreement.
Section 5.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same original instrument. Not all
parties need sign the same counterpart. Delivery by facsimile of a signature
page to this Agreement shall have the same effect as delivery of an original
executed counterpart.
Section 5.8 Successors and Assigns. Subject to Section 4.1(d), this
Agreement shall inure to the benefit of and be binding upon the successors,
assigns and transferees of each of the parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
the date first written above.
PEGASUS COMMUNICATIONS CORPORATION
By:-----------------------------------------
[Name]
[Title]
PEGASUS CAPITAL, L.P.
By: Pegasus Capital, Ltd., General Partner
By:-----------------------------------------
[Name]
[Title]
PEGASUS COMMUNICATIONS HOLDINGS, INC.
By:-----------------------------------------
[Name]
[Title]
PEGASUS SCRANTON OFFER CORP
By:-----------------------------------------
[Name]
[Title]
II-8
<PAGE>
PEGASUS NORTHWEST OFFER CORP
By:-----------------------------------------
[Name]
[Title]
--------------------------------------------
Marshall W. Pagon
FLEET VENTURE RESOURCES, INC.
By:-----------------------------------------
Riordon B. Smith
Senior Vice President
FLEET EQUITY PARTNERS VI, L.P.
By: Fleet Growth Resources II, Inc.
Its General Partner
By:-----------------------------------------
Riordon B. Smith
Senior Vice President
CHISHOLM PARTNERS III, L.P.
By: Silverado III L.P., its general partner
By: Silverado III Corp., its general partner
By:-----------------------------------------
Riordon B. Smith
Senior Vice President
KENNEDY PLAZA PARTNERS
By:-----------------------------------------
Riordon B. Smith
Senior Vice President
COLUMBIA CAPITAL CORPORATION
By:-----------------------------------------
Neil P. Byrne
Vice President
COLUMBIA DBS, INC.
By:-----------------------------------------
Neil P. Byrne
Vice President
SPECTRUM EQUITY INVESTORS, L.P.
By: Spectrum Equity Associates, L.P., its
general partner
By:-----------------------------------------
William P. Collatos
General Partner
II-9
<PAGE>
SPECTRUM EQUITY INVESTORS II, L.P.
By: Spectrum Equity Associates II, L.P., its
general partner
By:-----------------------------------------
William P. Collatos
General Partner
ALTA COMMUNICATIONS VI, L.P.
By: Alta Communications VI Management
Partners, L.P.,
its general partner
By:-----------------------------------------
Eileen McCarthy
General Partner
ALTA SUBORDINATED DEBT PARTNERS III, L.P.
By: Alta Subordinated Debt Management
Partners, L.P.,
its general partner
By:-----------------------------------------
Eileen McCarthy
General Partner
ALTA-COMM S BY S, LLC
By:-----------------------------------------
Eileen McCarthy
Member
II-10
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Covered Shares
---------------------------------------------
Shareholder Class A Common Stock Class B Common Stock
- ------------------------------------------- ---------------------- ---------------------
<S> <C> <C>
Fleet Venture Resources, Inc. 406,186
Fleet Equity Partners VI, L.P. 174,079
Chisholm Partners III, L.P. 147,611
Kennedy Plaza Partners 10,179
Columbia Capital Corporation 0
Columbia DBS, Inc. 0
Spectrum Equity Partners, L.P. [TBD]
Spectrum Equity Partners II, L.P. [TBD]
Alta Communications VI, L.P. [TBD]
Alta Subordinated Debt Partners III, L.P. [TBD]
Alta-Comm S By S LLC [TBD]
Pegasus Capital, L.P. 1,217,348
Pegasus Communications Holdings, Inc. 3,123,856
Pegasus Northwest Offer Corp. 122,338
Pegasus Scranton Offer Corp. 118,358
Marshall W. Pagon [TBD]
</TABLE>
II-11
<PAGE>
ANNEX III
AMENDMENT TO THE PEGASUS COMMUNICATIONS RESTRICTED STOCK PLAN
WHEREAS, Pegasus Communications Corporation (the "Company") amended and
restated the Pegasus Communications Restricted Stock Plan (the "Plan")
generally effective as of December 18, 1998;
WHEREAS, Section 10 of the Plan provides that the Company may amend the
Plan;
WHEREAS, the Company desires to amend the Plan to increase the number of
shares of Class A common stock of the Company available for awards under the
Plan;
NOW, THEREFORE, effective upon obtaining requisite shareholder approval,
the first sentence of Section 5 of the Plan is amended to read as follows:
SECTION 5
Stock
The number of shares of Common Stock that may be subject to Awards under
the Plan shall be 750,000 shares, subject to adjustment as hereinafter
provided.
III-1
<PAGE>
ANNEX IV
AMENDMENT TO THE PEGASUS COMMUNICATIONS 1996 STOCK OPTION PLAN
WHEREAS, Pegasus Communications Corporation (the "Company") amended and
restated the Pegasus Communications 1996 Stock Option Plan (the "Plan")
effective April 23, 1999;
WHEREAS, Section 12 of the Plan provides that the Company may amend the
Plan;
WHEREAS, the Company desires to amend the Plan (i) to increase the number
of shares of Class A common stock of the Company ("Common Stock") that may be
subject to options under the Plan, (ii) to increase the number of shares of
Common Stock that may be subject to options granted to any employee over the
life of the Plan; and (iii) to provide for the assumption of certain
outstanding Golden Sky Holdings, Inc. options;
NOW, THEREFORE, the Plan is amended as follows:
1. The first sentence of Section 4 is amended to read as follows,
effective on the date requisite shareholder approval of this Amendment is
obtained;
4. Stock. Options may be granted under the Plan to purchase up to a
maximum of 3,000,000 shares of Class A common stock of the Company ("Common
Stock"); provided, however, that no Employee shall receive Options for more
than 1,000,000 shares of the Company's Common Stock over the life of the
Plan. * * *
2. A new Section 23 is added following Section 22 to read as follows,
effective at the Effective Time (as defined in the Merger Agreement hereinafter
mentioned):
23. Special Provisions Regarding Golden Sky Holdings, Inc. Golden Sky
Holdings, Inc. ("Golden Sky") became a wholly-owned subsidiary of the
Company by means of the merger (the "Merger") of a wholly-owned subsidiary
of the Company into Golden Sky pursuant to the Agreement and Plan of Merger
dated January 10, 2000 (the "Merger Agreement") among the Company, Golden
Sky, Pegasus GSS Merger Sub, Inc. and certain stockholders of the Company
and Golden Sky. Section 2.12 of the Merger Agreement provides that the
Company will assume certain outstanding Golden Sky options specified
therein. Section 2.12 of the Merger Agreement also provides that such
Golden Sky options will be replaced with options (the "Replacement
Options") to purchase the number of shares of Common Stock equal to the
"conversion ratio" (as defined in the Merger Agreement) times the number of
shares of Golden Sky common stock issuable upon the exercise of such
options, for an exercise price equal to the exercise price applicable to
such options divided by the "conversion ratio."
Each Replacement Option shall be exercisable under the Plan in
accordance with the terms of the agreement entered into between the Company
and the holder of the Replacement Option (the "Replacement Agreement"), the
terms of which shall govern in the event of any conflict with the
provisions of the Plan. In addition, any provision of the Plan that would
provide an additional benefit (within the meaning of Section 424(a)(2) of
the Code and Treasury Regulations thereunder) shall not apply to the
Replacement Options.
IV-1
<PAGE>
ANNEX V
PROPOSED AMENDMENT TO PEGASUS' CERTIFICATE OF INCORPORATION TO
INCREASE AUTHORIZED CLASS A COMMON STOCK, CLASS B COMMON STOCK,
NON-VOTING COMMON STOCK AND PREFERRED STOCK
RESOLVED, that the amendment of the first paragraph of Article FOURTH of
Pegasus's Certificate of Incorporation to read in its entirety as follows (the
"Amendment") is hereby proposed and declared to be advisable and in the best
interests of Pegasus:
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is 500,000,000 shares, divided into 250,000,000
shares of Class A Common Stock, par value $0.01 per share, 30,000,000
shares of Class B Common Stock, par value $0.01 per share, 200,000,000
shares of Non-Voting Common Stock, par value $0.01 per share, and
20,000,000 shares of Preferred Stock, par value $0.01 per share.
FURTHER RESOLVED, that the Amendment be submitted for action to the
stockholders of Pegasus entitled to vote thereon.
FURTHER RESOLVED, that upon stockholder approval of the Amendment, each of
the President, any Vice President, the Chief Financial Officer, the Secretary
and any Assistant Secretary or any of them (herein the "Designated Officers,"
which shall refer to any or all of them) is hereby severally authorized to
execute and file on behalf of Pegasus such certificate or certificates as are
required to effectuate the Amendment under Delaware law and to take such other
actions as such Designated Officer deems necessary or appropriate to carry out
the foregoing resolutions; and the execution by any Designated Officer of any
such documents or the performance of any Designated Officer of any such act in
connection with the foregoing resolutions shall conclusively establish the
Designated Officer's authority therefor from Pegasus and approval and
ratification by Pegasus of the documents so executed and the actions so taken.
* * *
The proposed amendment reflects changes to the authorized number of shares
of Class A common stock, Class B common stock and preferred stock. These
changes reflect separate proposals (Proposals 4, 5, 6 and 7 on the Form of
Proxy), and shall be voted upon separately. Neither change is dependent upon
the other.
V-1
<PAGE>
ANNEX VI
[LETTERHEAD OF CIBC WORLD MARKETS CORP.]
January 10, 2000
The Board of Directors
Pegasus Communications Corporation
c/o Pegasus Communications Management Company
225 City Line Avenue, Suite 200
Bala Cynwyd, Pennsylvania 19004
Members of the Board:
You have asked CIBC World Markets Corp. ("CIBC World Markets") to render a
written opinion ("Opinion") to the Board of Directors as to the fairness to
Pegasus Communications Corporation ("Pegasus"), from a financial point of view,
of the Exchange Ratio (defined below) provided for in the Agreement and Plan of
Merger, dated as of January 10, 2000 (the "Merger Agreement"), by and among
Pegasus, Pegasus GSS Merger Sub, Inc. ("Sub"), Golden Sky Holdings, Inc.
("Golden Sky"), certain principal shareholders of Pegasus and certain principal
shareholders of Golden Sky. The Merger Agreement provides for, among other
things, the merger of Sub with and into Golden Sky (the "Merger") pursuant to
which all outstanding shares of the common stock, par value $0.01 per share, of
Golden Sky ("Golden Sky Common Stock") and all outstanding series of shares of
the preferred stock, each with a par value of $0.01 per share, of Golden Sky
(collectively, "Golden Sky Preferred Stock" and, together with the Golden Sky
Common Stock, the "Golden Sky Capital Stock") will be converted into the right
to receive an aggregate of 6,500,000 shares of the Class A common stock, par
value $0.01 per share, of Pegasus ("Pegasus Class A Common Stock" and, the
aggregate number of shares of Pegasus Class A Stock into which the aggregate
number of shares of Golden Sky Capital Stock will be so converted in the
Merger, the "Exchange Ratio"), subject to downward adjustment as more fully
described in the Merger Agreement. The Merger Agreement further provides that a
portion of the shares of Pegasus Class A Common Stock issuable in the Merger
will be subject to an escrow arrangement, as more fully described in the Merger
Agreement and related escrow agreement.
In arriving at our Opinion, we:
(a) reviewed the Merger Agreement and certain related documents;
(b) reviewed audited financial statements of Pegasus and Golden Sky for
the fiscal years ended December 31, 1997 and December 31, 1998;
(c) reviewed unaudited financial statements of Pegasus and Golden Sky for
the nine months ended September 30, 1999;
(d) reviewed financial projections prepared by the managements of Pegasus
and Golden Sky;
(e) reviewed the historical market prices and trading volume for Pegasus
Class A Common Stock;
(f) held discussions with the senior managements of Pegasus and Golden Sky
with respect to the businesses and prospects for future growth of
Pegasus and Golden Sky;
(g) reviewed and analyzed certain publicly available financial data for
certain companies we deemed comparable to Pegasus and Golden Sky;
(h) reviewed and analyzed certain publicly available information for
transactions that we deemed comparable to the Merger;
(i) performed discounted cash flow analyses of Pegasus and Golden Sky
using certain assumptions of future performance provided to us by the
managements of Pegasus and Golden Sky;
VI-1
<PAGE>
The Board of Directors
Pegasus Communications Corporation
January 10, 2000
Page 2
(j) reviewed public information concerning Pegasus and affiliates of
Golden Sky; and
(k) performed such other analyses and reviewed such other information as
we deemed appropriate.
In rendering our Opinion, we relied upon and assumed, without independent
verification or investigation, the accuracy and completeness of all of the
financial and other information provided to or discussed with us by Pegasus,
Golden Sky and their respective employees, representatives and affiliates. With
respect to forecasts of future financial condition and operating results of
Pegasus and Golden Sky and the potential synergies and strategic benefits
(including the amount, timing and achievability thereof) anticipated to result
from the Merger provided to or discussed with us, we assumed, at the direction
of the managements of Pegasus and Golden Sky, without independent verification
or investigation, that such forecasts were reasonably prepared on bases
reflecting the best available information, estimates and judgments of the
managements of Pegasus and Golden Sky. We also have assumed, with the consent
of Pegasus, that the Merger will be treated as a tax-free reorganization for
federal income tax purposes and, to the extent material to our analysis, that
the Merger will be consummated on the terms described in the Merger Agreement,
without any waiver or modification of the material terms or conditions thereof.
We further have assumed, with your consent, without independent verification or
investigation, that the outcome of the existing litigation and related
proceedings between the National Rural Telecommunications Cooperative and
DirecTV, Inc. will not have a material adverse effect on the financial
condition or results of operations of Pegasus or Golden Sky. We have neither
made nor obtained any independent evaluations or appraisals of the assets or
the liabilities of Pegasus, Golden Sky or affiliated entities. We are not
expressing any opinion as to the underlying valuation, future performance or
long-term viability of Pegasus or Golden Sky, or the price at which the Pegasus
Class A Common Stock will trade subsequent to announcement or consummation of
the Merger. We were not requested to, and we did not, participate in the
negotiation or structuring of the Merger. Our Opinion is necessarily based on
the information available to us and general economic, financial and stock
market conditions and circumstances as they exist and can be evaluated by us on
the date hereof. It should be understood that, although subsequent developments
may affect this Opinion, we do not have any obligation to update, revise or
reaffirm the Opinion.
As part of our investment banking business, we are regularly engaged in
valuations of businesses and securities in connection with acquisitions and
mergers, underwritings, secondary distributions of securities, private
placements and valuations for other purposes.
We have acted as financial advisor to the Board of Directors of Pegasus in
rendering this Opinion and will receive a fee upon the delivery of this
Opinion. We have in the past provided and are currently providing services to
Pegasus unrelated to the proposed Merger, for which services we have received
and will receive compensation. As you are aware, a managing director of CIBC
World Markets is a director of Pegasus and, in his capacity as such, holds
options to purchase shares of Pegasus Class A Common Stock. In the ordinary
course of business, CIBC World Markets and its affiliates may actively trade
securities of Pegasus and affiliates of Golden Sky for their own account and
for the accounts of customers and, accordingly, may at any time hold a long or
short position in such securities.
Based upon and subject to the foregoing, and such other factors as we
deemed relevant, it is our opinion that, as of the date hereof, the Exchange
Ratio is fair to Pegasus from a financial point of view. This Opinion is for
the use of the Board of Directors of Pegasus in its evaluation of the Merger
and does not constitute a recommendation as to how any stockholder should vote
with respect to any matters relating to the Merger.
Very truly yours,
/s/ CIBC WORLD MARKETS CORP.
CIBC WORLD MARKETS CORP.
VI-2
<PAGE>
ANNEX VII
FORM OF PROXY
PEGASUS COMMUNICATIONS CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE
The undersigned, revoking all prior proxies, hereby appoints Marshall W. Pagon,
M. Kasin Smith and Ted S. Lodge, or any of them, with full power of
substitution, as the undersigned's proxies to vote all the shares of Class A
common stock and Class B common stock of Pegasus Communications Corporation
held of record by the undersigned on February 25, 2000, at the Special Meeting
of Stockholders of Pegasus to be held on March 22, 2000 and at any adjournment
or postponement thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1, 2, 3, 4, 5, 6 AND 7.
Proposal 1: Approval of the Merger Agreement and the transactions contemplated
thereby, including the issuance of up to 6.5 million shares of Class
A common stock.
/ / FOR / / AGAINST / / ABSTAIN
Proposal 2: Approval of the proposal to amend Pegasus' Restricted Stock Plan to
increase the number of shares of Class A common stock that may be
issued thereunder from 350,000 to 750,000.
/ / FOR / / AGAINST / / ABSTAIN
Proposal 3: Approval of the proposal to amend Pegasus' 1996 Stock Option Plan
to increase the number of shares of Class A common stock that may be
issued thereunder from 1,300,000 to 3,000,000 and to increase the
maximum number of shares of Class A common stock that may be issued
under options granted to any employee from 550,000 to 1,000,000.
/ / FOR / / AGAINST / / ABSTAIN
Proposal 4: Approval of the proposal to amend Pegasus' certificate of
incorporation to increase the number of authorized shares of Class A
common stock from 50,000,000 to 250,000,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
Proposal 5: Approval of the proposal to amend Pegasus' certificate of
incorporation to increase the number of authorized shares of Class B
common stock from 15,000,000 to 30,000,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
Proposal 6: Approval of the proposal to amend Pegasus' certificate of
incorporation to increase the number of authorized shares of
non-voting common stock from 20,000,000 to 200,000,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
Proposal 7: Approval of the proposal to amend Pegasus' certificate of
incorporation to increase the number of authorized shares of
preferred stock from 5,000,000 to 20,000,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
Proposal 8: IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
<PAGE>
You are urged to sign and return this proxy so that you may be sure that your
shares will be voted.
Dated: _____________________, 2000
-----------------------------------
Signature of Stockholder
-----------------------------------
Signature of Stockholder
Please sign exactly as your name appears hereon, date and return promptly. When
shares are held by joint tenants, both should sign. Executors, administrators,
trustees and other fiduciaries should indicate their capacity when signing.
